When we’re searching for tasty dividends, we need to look for more than just tempting yields — it’s obviously no good plumping for last year’s big dividends if hard times mean the firms have to slash their payments this year. So we need to ask ourselves other questions: Does the company have a progressive dividend policy? Are its dividends covered by earnings? Will I actually get the cash?
Resurgent telecoms
If I’d asked myself those questions about TalkTalk Telecom Group (LSE: TALK) two years ago, or even last year, it would mostly have been a resounding No.
On the upside, the company had maintained its insistence that it would keep the cash flowing, but we haven’t seen a dividend actually covered by earnings since 2013 — and for the following three years it was little more than 50% covered, which isn’t a sustainable long-term situation.
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Then last October we had the embarrassing security breach in which hackers accessed the personal details of 157,000 customers, which led to a whopping £400,000 fine for TalkTalk this week. I was convinced there were far better prospects for reliable dividends out there.
But what a difference a year makes. While the 12 months ending 31 March weren’t spectacular, a strong Q4 recovery suggested things could be turning around, and the company lifted its dividend by 15% “in line with commitment” and said the 2017 payment should be at least as good.
If earnings for the current year turn out as well as TalkTalk suggests, the forecast EPS rise of 70% could really be on the cards, and the dividend stream could turn out as reliable as the company hopes. The 7.8% yield pencilled-in for this year would still not quite be covered by forecast earnings, but 2018’s would be.
I reckon this is one dividend that’s not going to disappoint.
Insurance out of the woods?
A few insurers had to cut their dividend payments in the wake of the banking crisis, and the sector was hit once again when the Brexit vote turned all financial stocks into pariahs.
But you’d never guess that looking at the record of Standard Life (LSE: SL) over the past five years, with its steadily rising annual dividends and with two more years of increases forecast. Yields are forecast to come in at 5.7% this year and 6.2% next, but we really have to check on how cover by earnings has gone.
Standard Life has done a bit better than TalkTalk, but it has still paid out dividends that have exceeded earnings for the past three years. Earnings only covered around 90% of 2014’s and 2015’s dividends, and that dropped to just 74% last year — another candidate, I’d have said, for a likely dividend cut.
But that 2015 dividend represented an 8% uplift, and at the time Standard Life said it “will continue to apply its existing progressive… dividend policy.“
The company’s recovery appeared suitably impressive at the interim stage in August, despite considerable uncertainty (from the EU referendum and from other quarters), and the latest forecasts suggest a near doubling of earnings this year with a further 10% growth on the cards for 2017.
That would leave 2016 and 2017 dividends covered 1.31 times and 1.34 times respectively, which seems enough to make the payments happen. Those big predicted yields are looking good to me.
