HSBC (LSE: HSBA) and Centrica (LSE: CNA) look to be two of the FTSE 100’s most attractive dividend stocks. Both support dividend yields in excess of 6% and based on historic figures, these payouts are covered one-and-a-half times by earnings per share.
However, if a share’s dividend yield exceeds that of the wider market, it usually signals that investors aren’t wholly convinced that the payout is here to stay. The FTSE 100’s yield is 4.2%, so it would appear that the majority of traders and investors believe HSBC and Centrica will be forced to cut their dividend payouts in the near future.
Another cut coming?
Centrica has already cut its payout once in the past 12 months as falling oil and gas prices hurt profits at its upstream production business. Problems with a new billing system in its British Gas Business arm have also caused problems, and this division is now expected to report a loss for the year.
Still, 2015 was something of a transformation year for Centrica. After the new CEO Iain Conn settled in, Centrica began to slash capital spending and rebalance the business away from hydrocarbon production and towards domestic energy supply. For the first six months of 2015, around two-thirds of Centrica’s operating profits came from the domestic supply business, a significant change from last year. This change should help stabilise Centrica’s earnings going forward. For 2015, the group expects to generate £2bn in adjusted operating cash flow and analysts believe the company could report between £1.1bn and £1.4bn in pre-tax profit, compared to £1.4bn last year.
Based on management’s expectation of £2bn in adjusted operating cash flow for 2015 and capital spending requirements of less than £1bn, Centrica has approximately £1bn to fund the dividend. On a cash basis, Centrica’s full-year dividend payout of 12p per share cost the company around £320m last year.
So, based on these figures, it looks as if Centrica’s 6.5% dividend yield is here to stay.
Difficult to assess
The sustainability of HSBC’s dividend is harder to evaluate. At first glance, the bank’s dividend payout is covered one-and-a-half times by earnings per share. But unlike Centrica’s domestic energy supply business, which is relatively defensive, HSBC’s income is more unpredictable.
Indeed, HSBC depends on China and Hong Kong for a large chunk of its income and the outlooks for both is extremely unpredictable. Many analysts believe that China is heading for a hard landing, and even a small increase in loan losses for HSBC could send shockwaves across the group’s balance sheet, forcing management to cut the dividend to preserve cash.
That said, HSBC has plenty of experience navigating the peaks and troughs of financial markets, so it’s likely that the bank has prepared for the worst. But HSBC’s current dividend yield of 7.4% suggests that many market participants aren’t convinced that the bank is prepared for a crisis and believe there are better income stocks out there.
