The FTSE 100 is chock full of firms offering dividends to those of us investing primarily for income. That’s not to say all are equally worthy of our cash. For me, three of the index’s biggest payers still carry considerable risks.
On the face of it, housebuilder Persimmon (LSE: PSN) looks a screaming buy, with shares trading at just 7 times forecast earnings and yielding a stonking 12%. Dig a little deeper, however, and some cracks in the investment case begin to appear.
Last night’s Channel 4 Dispatches investigation into allegations of shoddy workmanship, poor customer care and excessive profits at the £6.3bn-cap is concerning for investors. Further complaints could risk the company being expelled from the lucrative Help to Buy scheme that has benefited its bottom line so much over the years and makes up almost half of Persimmon’s sales.
The fact that we’re still no closer to knowing what sort of Brexit we will get at the end of October (assuming we get one at all) is another reason I continue to be wary of cyclical companies such as this.
Should a recession hit the UK and activity in the housing market slow, that ‘bargain’ valuation will quickly disappear and the huge dividend — covered just 1.2 times by profits — could be in danger.
Another firm vulnerable to the ongoing uncertainty surrounding our EU departure is holiday operator TUI Travel (LSE: TUI). With a difficult trading environment already forcing the company to issue two profit warnings so far in 2019, Tui also continues to be impacted by the grounding of Boeing 737 MAX planes around the world following two fatal crashes in only a few months. Investors can probably expect more pain to follow if this issue isn’t resolved soon.
It may not be in the same sorry state as industry peer Thomas Cook but, with such an uncertain outlook, I’m struggling to see the attractions of investing when there are so many, less risky income-generating opportunities elsewhere.
The shares have more than halved in value over the last 12 months and now change hands on a little under 11 times forecast earnings. The dividend yield is 6.8% at the current price, covered 1.4 times by profits.
Third on my list of high-yielding FTSE 100 stocks I’m continuing to avoid is energy supplier Centrica (LSE: CNA). With a yield of approaching 14%, the company is theoretically the biggest dividend payer in the index. As a result of competitors continuing to tempt customers away and onerous pension obligations, however, a slash to the payout looks inevitable.
Of course, I’m not alone in thinking this. Having once predicted it would be reduced by a third, analysts at Credit Suisse now believe a 50% cut to 6p per share is on the cards and could be announced at the same time as the firm’s half-year figures on 30 July. That would leave the stock yielding 6.7%, which some may argue is still too high.
With the share price now at its lowest point in 20 years, it’s quite possible the market will respond positively once this news is announced and Centrica may experience a brief bounce. Factor in the perpetual threat of political interference, however, and I just can’t see the stock — available at 11 times earnings — as anything more than a value trap.
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Paul Summers 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.