With the whiff of earnings slowdowns in the air, inevitably investors are becoming more and more concerned over how dividends will pan out in 2019 and beyond. They’re also concern over whether there could be some more painful payout cuts in the offing.
We’ve already had some notable dividend slashes on the FTSE 100 this year as Vodafone took the hatchet to the annual reward for the first time in its history. But it’s unlikely to be the last to hack back rewards, and I believe Evraz (LSE: EVR) could be one blue-chip to follow the same route.
City analysts certainly believe it’ll be forced to reduce the dividend in the current year, a figure of 38 US cents currently being touted and one which would represent a shocking decline from 2018’s 78-cent one.
Some might still be tempted by Evraz’s bulky 5.8% forward yield, one that rips apart the broader Footsie yield which sits at a more modest 4.5%. However, I suggest you be prepared for an even-bigger reduction. The current estimate is covered just 1.5 times by anticipated earnings, way below the accepted safety benchmark of 2 times.
At the moment Evraz appears to be riding the crest of a wave, and this is reflected in its share price which is soaring amid sky-high iron ore prices and strong steel production all over the globe. It’s risen 10% over the past month alone and has been punching fresh record tops in June.
The business is involved in all steps of the steel industry, from hauling essential materials for the production process like coal and iron ore from the ground, to producing the material and selling and shipping it to its customers all over the globe. It’s clearly a classic cyclical stock and this makes me pretty fearful, to be honest, as the warning lights for the global economy get brighter and brighter.
Right now, the number crunchers expect Evraz to endure a 35% earnings slump in 2019. But there could be much more bottom-line woes well beyond the current period should, as I expect, auto production continue to slump and the global construction industry follows it down the swanny.
Cash ain’t king
Evraz has one saving grace in its arsenal though and, to be fair, it’s a pretty impressive one. Put simply the commodities colossus throws cash out at a spectacular rate and, on paper, this could help it defend dividends from huge drops when market cyclicality hits profits. Last year free cash flow stood at a whopping $1.9bn, up more than $600m year on year.
That said, the business still has a hell of a lot of net debt on its books — $3.6bn as of December, to be exact — and, of course, it’ll need to keep servicing this even if earnings take a dive. Needless to say this could come at the expense of dividends.
If you’re hunting for big dividends on the FTSE 100, great. Arguably there’s never been a better time to grab a slice of the action. I would argue, though, that Evraz is a share that’s probably worth avoiding at the current time.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.