Will BP plc & HSBC Holdings plc Follow Tesco PLC And Cut Their Dividends?

Tesco PLC (LON:TSCO) has set a dangerous precedent for management at BP plc (LON:BP) and HSBC Holdings plc (LON:HSBA), says Harvey Jones

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

bpEven when a dividend cut has been heavily trailed, it always comes as a shock when it finally happens. That’s certainly the case with Tesco (LSE: TSCO). 

People knew the survival of the dividend was in doubt, but that didn’t stop the share price from plunging sharply on the day. What made it worse was the scale of the cut, a brutal 75%. Few expected something quite so drastic.

New boss Dave Lewis has a long way to go to restore investor confidence. Especially with the spectre of sectoral decline looming heavily.

Latest figures show wages rising at a meagre 0.6% a year. If Lewis does trigger another price war, he will have to cut deep to make hard-up shoppers feel like their money really is stretching further.

Axeman Cometh

Worse, even when the bad news had been absorbed, Tesco’s share price has continued to slide. Which should worry anybody holding shares in BP (LSE: BP) (NYSE: BP.US) and HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US), because both companies have an axe hovering over their dividends.

The blow would be particularly bitter for BP investors, as its dividend was only restored recently, after being axed in the immediate wake of the Deepwater Horizon tragedy.

Now it is under threat again, following the recent US district court ruling that found BP guilty of “gross negligence” paving the way for another $18bn of fines.

BP is going to appeal, but if it loses its profits will inevitably take a hit, and investors will foot the bill, as its dividend and share buyback programme may be scaled back or possibly even scrapped.

Analysts are already predicting that BP’s cash flow could be flat over the next few years at around $31bn. That should be enough to cover its $25bn capital expenditure programme, but leaves little scope for dividend progression.

We may learn more next month, when BP posts its Q3 results. But the US appeal will no doubt drag on, and continue to cast a shadow over BP’s share price.

Today’s duty 4.8% yield can’t be relied on.

I Feel Fine

Ace dividend investor Neil Woodford was the first to publicly raise the danger of HSBC being forced to cut its dividend, as a result of regulatory “fine inflation”.

He thought the risk was so great, he dumped the stock, the last remaining bank he was holding.

Since HSBC is the world’s largest banking and financial services group, it is most at risk from fine inflation if regulators set their penalties according to company size.

Woodford warned that an ongoing investigation into the historic manipulation of Libor an foreign exchange markets, serious offences if found true, could hit HSBC’s ability to grow its dividend.

All the banks face a ceaseless flow of fines, especially from the US, which continue to eat away at profits. Only last week, HSBC agreed to pay $550m to settle a lawsuit filed in 2011 by the Federal Housing Finance Agency, over mortgaged-backed securities sold in the run-up to the financial crisis. 

HSBC’s dividend, currently yields 4.5%, covered 1.7 times, was already said to be under threat, following last month’s disappointing interim results, which showed a 12% drop in reported pre-tax profits to $12.3bn.

Now it is in even greater danger.

Shock Doctrine

While I wouldn’t expect HSBC to slash its dividend by as much as 75%, future growth could be disappointing. BP’s dividend is in the lap of the legal gods.

Anybody considering buying these two companies must brace themselves for a shock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »