Dividends are important and the appeal of some stocks relies on them. But sales difficulties across the entire business makes Centrica (LSE: CNA) a dicey pick for spectacular dividends, in my opinion.
The FTSE 100 (INDEXFTSE: UKX) energy play has cut the payout twice in the past two years as earnings have tanked. But the City expects payouts to turn higher again in 2016, even though a third successive dip is predicted. Last year’s reward of 12p per share is anticipated to rise to 12.3p, yielding a smashing 5.2%.
But the forecast 10% bottom-line dip leaves the dividend covered just 1.3 times by earnings, some way short of the safety benchmark of two times. And Centrica’s balance sheet can hardly be considered robust enough to support gargantuan dividends — net debt rang in at an eye-watering £3.8bn as of June.
Meanwhile, the revenues slump at Centrica show no sign of ending either. The firm saw accounts at British Gas slump a further 3% during January-March as competitive pressures increased. And abundant supply in the oil market threatens to keep crude values under the cosh too.
A sour dividend outlook
A patchy sales outlook at Sainsbury’s (LSE: SBRY) should also concern income chasers, in my opinion.
Like Centrica, the groceries goliath is being whacked by rising competition, particularly as shoppers flock in earnest to Aldi and Lidl. Indeed, latest Kantar Worldpanel data showed sales at Sainsbury’s eroded 0.6% during the 12 weeks to 14 August. By comparison, sales at Aldi and Lidl exploded 10.4% and 12.2% respectively.
And Sainsbury’s is likely to remain on a path of earnings-sapping price-cutting to stop the rot, a worrying omen for future dividends. The recent takeover of Argos will of course require massive investment too, as takings at the catalogue specialist are also spinning lower.
The number crunchers expect another dividend reduction at Sainsbury’s in the period to March 2017, to 10.3p per share from 12.1p last year, although this still yields a tempting 4.2%.
But while dividend coverage stands at a robust two times, due to a predicted 10% earnings fall, net debt of £1.83bn as of March — allied with the likelihood of prolonged sales pressures — makes me think that a much-bigger dividend cut could be on the cards.
Medical might
I have no fear that pharmaceuticals colossus AstraZeneca (LSE: AZN) is about to disappoint dividend hunters, however.
The City expects the Cambridge business to keep the dividend locked on hold at 280 US cents per share through to the end of next year. This results in a market-beating yield of 4.4%.
Expectations of further earnings weakness should naturally alarm dividend chasers, of course. The impact of patent expirations, and AstraZeneca’s delayed attempts to address this, is anticipated to result in modest single-digit earnings declines through to the close of 2017. And dividend cover comes in at around 1.5 times for this period too.
Still, I’m confident AstraZeneca’s pumped-up product pipeline should give it the confidence to ride out the current earnings storm and meet current forecasts. The successful launch of Tagrisso helped power sales at its new oncology unit to $251m during the first half, for example. And I believe AstraZeneca has plenty more rabbits to pull out of the hat in the months and years to come.
