With dividends from UK plc perched at record highs right now, it’s clear that with a sound investment strategy share investors can make a fortune from income shares.
But don’t go charging in just yet! With the British (and global) economy slowing as we head into 2020, there’s a number of high-profile companies with big dividend yields that could well cut shareholder payouts in the new year. Take FTSE 100 supermarket J Sainsbury, for example.
City analysts expect a modest reduction in dividends for the year ending March 2020, to 10.6p per share from 11p last time out. But I fear that a much bigger cut could be in the offing as it grapples with a monster net debt pile of around £6.8bn and a worsening trading outlook.
Recent Kantar Worldpanel data showed another sales drop at Sainsbury in the 12 weeks to December 1 amid intense consumer caution.
That forecasted dividend is also covered 1.8 times by anticipated earnings, below the widely accepted security minimum of 2 times. This is why I’m happy to avoid the grocer despite its big 4.8% forward yield.
Another possible slasher?
I’m also quite fearful that BHP Group (LSE: BHP) might scythe down dividends over the next year or so.
City analysts are predicting that the mining mammoth will keep the full-year reward for the fiscal period to June 2020 frozen at 133 US cents per share, but with worsening trade tensions exacerbating the recent slowdown in global growth, I fear that commodity prices, and thus profits and consequently dividends at the Footsie firm, might head through the floor.
Let’s look at the numbers. Firstly, the projected dividend is covered just 1.5 times by anticipated earnings, even worse than the reading over at Sainsbury’s. It is also nursing a $9.2bn net debt pile, a level which although down by an impressive $17bn over the past three years might be difficult to contend with should iron ore values, for example, head down the toilet.
And lastly, BHP has half a dozen major development projects spanning the petroleum, copper, iron ore, and potash markets, assets with a combined $11.4bn budget, which the business will also have to finance, possibly at the expense of dividends.
For this reason I’m not bowled over by the company’s 6% forward payout yield.
How about BT’s 8% yield?
I also worry that BT Group (LSE: BT-A) might be forced to bite the bullet and hack back the dividend in the near future, even if City analysts expect yet another 15.4p per share reward – one which yields a giant 8.1% – to come down the tracks.
Dividend coverage here, too, is inadequate at 1.5 times. Net debt rocketed in the six months to September, up an eye-watering £6.5bn year on year to £18.3bn.
And the telecoms titan faces extreme stress to keep its balance sheet in any sort of decent shape as revenues drop (down 1% in the first fiscal half), its Openreach infrastructure division eats up vats of cash, and the business invests vast sums to improve the attractiveness of its products in an increasingly-competitive market. It agreed to pay £400m a year for exclusive rights to show UEFA Champions League, Europa League, and new Europa Conference League live football over the next five years, for example.
