What does it mean when a company’s dividend forecast outstrips its earnings? It can mean, as we saw in the insurance sector so recently, that management is losing its grip and has failed to see the inevitable need to cut back an overstretched payment policy.
Or, as I believe is the case with GlaxoSmithKline (LSE: GSK), it can signal a confidence in the future of the company’s earnings growth. With Glaxo’s earnings falling for the past three years on the back of its patent expiry crisis and expected to continue downwards this year, its prospective dividend yield has soared to 6.1% on a share price of 1,304p. But the 80p payment per share that the company says it expects to maintain for the full year would outstrip forecast EPS of 75p.
Looking a year ahead, though, there’s an EPS recovery of 12% on the cards for 2016, to around 84p, which would just about provide cover for a predicted dividend rise to 82p. But is the company’s confidence misplaced and will the cash have to be cut? Well, at interim time CEO Sir Andrew Witty said that “…we remain confident that we can achieve our targets for this year and return the Group to earnings growth in 2016“, and that’s essentially been the plan since the firm’s turnaround strategy was launched.
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Cash from insurance
Speaking of insurance, a special dividend financed by the sale of its International division and already paid should take Direct Line Insurance Group (LSE: DLG) shareholders’ income this year up to a one-off of at least 13% on its 376p shares. Direct Line usually makes a special payment at the end of each year too, last year handing over a total yield of more than 9%.
Some would be wary of relying on such high levels of cash return over the longer term, but the motor insurance business seems to be in reasonable shape at the moment with last year’s fall in gross written premiums stabilized by the halfway stage this year, and Direct Line looks able to pay out the lion’s share of its earnings as cash once again. And you never know, there might even be a takeover possibility after Mitsui Sumitomo‘s recent move on Amlin.
Utilities losing their shine?
What about those old favourites with income investors, the utilities companies? SSE (LSE: SSE) has been a steady provider, and the predicted rise in its dividend for the year to March 2016 would provide a yield of 5.8% at a share price of 1,545p, with a modest further boost taking it to 5.9% a year later.
With expected yields that high, why are the shares persistently on a P/E that’s lower than the market average? There’s an 11% fall in EPS expected this year, which would drop dividend cover to around 1.2 times, and that’s getting a bit stretched even for a predictable energy supplier.
Then there are threats to revenues coming from increased competition, falling demand, and the fear of cranked-up industry regulation. And some are even thinking the unthinkable — that SSE and the others might have to cut their dividends. But I’m not that pessimistic myself, and I can see SSE as a solid income earner for quite some time to come.
