Finding high-yielding stocks in the FTSE 100 isn’t a particularly difficult task at present. Whether those cash returns are sustainable, however, is another thing entirely.
Today I’m looking at three of the biggest dividend payers in the market’s top tier and asking whether any are worthy of investment right now.
Buyer beware
British Gas owner Centrica (LSE: CNA) is expected to return 12p per share in the current financial year. Based on its share price before markets opened this morning, that equates to a stonking 8.8% yield.
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As my Foolish colleague Roland Head summarised last week, the energy giant continues to lose customers to smaller, more nimble rivals. The prospect of ongoing political interference isn’t helping sentiment either.
In order to return to growth, it’s clear that Centrica needs to continue investing in capital-intensive projects. But given that dividends are often the first things to be sacrificed in an effort to find the cash needed, I still maintain that a cut is more likely than not.
Changing hands for less than 11 times expected earnings, one could argue that the firm’s current valuation reflects its many troubles. Personally, I can’t see anything other than a painfully slow recovery at best.
Like Centrica, tobacco giant Imperial Brands (LSE: IMB) offers a compelling yield of well over 8%. Again like Centrica, the £23bn cap has also seen a sustained sell-off in its shares over the last few years.
Clearly, the declining popularity of cigarettes in the increasingly health-conscious West goes some way to explaining this downward trajectory. With talk of even banning smoking in city centres, the potential for further regulation is never far away.
That said, I’m optimistic on the company’s ability to capitalise on the rise of vaping especially as the number of e-cigarette users in Great Britain is now four times the number it was in 2012 (according to a recent survey by Action on Smoking and Health). As the owner of the brand blu, Imperial looks nicely positioned to take advantage of this gradual move away from tobacco.
A valuation of under nine times earnings certainly suggests value for those willing to take a contrarian stance. Unlike its aforementioned FTSE 100 peer, Imperial’s dividends also appear better covered by profits and consequently less susceptible to being chopped by management.
Forecast to yield ‘just’ 7.6% in 2018/19, postal service provider Royal Mail (LSE: RMG) is the least generous of the trio from a dividend perspective, even if this return is still far higher than the 4.5% offered by the FTSE 100 as a whole.
The shares have fallen heavily over the last couple of months following a profit warning at the start of October and news that the £3.3bn cap has been struggling to contain costs as much as hoped.
This news, when combined with its likely demotion from the FTSE 100 next month and a struggling letters business, suggests Royal Mail’s shares are unlikely to move higher any time soon and could face more selling pressure over the next few months if investors continue to fret over the health of the UK economy following Brexit.
Given these hurdles, a price-to-earnings (P/E) ratio of 12 still looks dear, in my opinion. As such, I’d continue to exercise caution for now, at least until new CEO Rico Back has provided the market with details of his strategy for turning the company around.
