BHP Billiton (LSE: BLT) is likely to face a shortfall in operating cash flow to fund its dividends and capital spending requirements. So far, though, BHP has committed to its dividend plan. But with net debt steadily rising, the miner would at some point need to re-prioritise lowering its level of indebtedness, unless commodity prices make a substantial recovery from today’s levels.
The volatility of commodity prices makes mining companies less attractive income plays. But BHP’s size and financial strength means that its dividend is safe for at least another two or three years. And as the company is increasingly judged by its yield, which stands at 6.5%, shares in BHP Billiton are unlikely to fall much further in the short to medium term.
Amlin
Business-focused insurer Amlin (LSE: AML) has recently seen a benign level of claims. In 2014, it achieved a combined ratio of 89%. A combined ratio of below 100% represents underwriting profits.
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But with the market softening; underwriting profitability going forward is likely to be significantly lower. Nevertheless, the insurer’s lean operating cost base and its stable combined ratios show it is competitively placed in the market.
Analysts expect its earnings will fall by 14% this year, which implies a forward P/E of 11.9. Its prospective dividend yield of 6.0% is particularly attractive, and it is covered by 1.4x earnings.
Lancashire Holdings
Diversified insurer Lancashire Holdings (LSE: LRE) had a combined ratio of 68.7% in 2014, which reflects an even higher level of underwriting profitability per dollar of premiums earned.
Including the value of special dividends, analysts expect Lancashire is set to yield 9.9% this year, and 9.1% for 2016. Lancashire is able to pay substantially all of its earning over the next few years; because it is in a strong capital position, and underwriting profitability had been particularly robust.
According to current analysts’ forecasts, Lancashire is currently trading at a forward P/E of 10.3, despite estimates of a 28% decline in underlying earnings as the market softens.
SSE
SSE (LSE: SSE) is widely considered as a dividend stalwart, as the electric utility company almost invariably pays a dividend yield in excess of 5% every year. Because of lower wholesale electricity prices, electricity generation margins are likely to continue to worsen. Analysts expect adjusted EPS will fall by 11% to 110.1 pence for 2015/6. This will give SSE a modest P/E of 13.6 and its expected dividend yield will be 5.8%.
The main attraction of SSE is that half its underlying earnings comes from its regulated assets, which generate stable cash flows, even when wholesale electricity prices fall or when electricity demand slumps. This helps to ensure that its dividend is fully funded, even though its dividend cover on earnings is relatively low, estimated at 1.2x on 2015/6 forecasts.
Greencoat UK Wind
Greencoat UK Wind (LSE: UKW) is an investment company focused on onshore wind farms. The end of the Renewable Obligation Certificate (ROC) subsidy scheme will no doubt hurt the expected returns of new onshore wind projects in the longer term, but this should also increase the value of its existing portfolio of wind assets. In addition, the newer contract-for-difference (CFD) scheme are not as bad as they initially seem, and investment returns should continue to be relatively attractive.
Because wind farms receive a significant proportion of their revenues through subsidies, their cash flow is typically more stable than fossil fuel electricity producers. This also allows Greencoat to pay out almost all of its earnings to its shareholders through dividends.
Greencoat currently supports a dividend yield of 5.4%.
