At first glance, both Tesco (LSE: TSCO) and BP (LSE: BP) appear to be great stocks for dividend chasers to invest in today, albeit for different reasons.
Those on the hunt for big yields may prefer to buy the FTSE 100 energy colossus. City analysts are expecting the annual dividend to edge slightly higher in 2018, to 41 US cents per share from 40 cents last year, following the dividend hikes of quarters two and three. And this results in a massive 6% yield.
Things get better for next year, too. An anticipated 42-cent-per-share reward is anticipated, yielding a stunning 6.1%.
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Yields at Tesco sit well below these levels, at 2.6% and 3.7% for the years to February 2019 and 2020 respectively, although they still surge past current inflation rates in the UK. For those seeking tearaway dividend growth though, the supermarket is, on paper, a much better selection that BP.
City brokers are predicting that last year’s 3p per share dividend will sprint to 5.2p in the current period, and again to 7.4p in fiscal 2020.
German invasion
So which is the better bet? Well as far as I’m concerned, Tesco is a share that carries far too much risk at the moment, given the ongoing fragmentation of the UK grocery sector.
Those aforementioned dividend projections are built on heady earnings growth estimates of 18% and 20% for this year and next. But I believe profits could slow to a crawl again from next year, a situation that could see that heady dividend growth fail to launch.
I’ve long talked about the threats posed by Aldi and Lidl and the extent of their attack was underlined by a report from trade bible Retail Gazette just today. Aldi, for instance, this week opened eight stores in just one day, part of its programme of adding some 24 new outlets in the run-up to Christmas. It’s the latest leg in the value supermarket’s plan to have around 1,000 stores up and running by 2022, up from around 800 at present.
Let’s not forget the risks that J Sainsbury’s planned merger with Asda, as well as Amazon’s move into the online grocery space, also pose to Tesco, exacerbating the need for the business to remain embarked on an earnings-destructive path of heavy discounting.
Supply-side worries
Tesco’s forward P/E ratio of 14.2 times is low, but it’s not low enough to tempt me to invest. So what about BP instead? Indeed, the Footsie energy producer deals on an even-cheaper prospective P/E multiple of 11.3 times.
As I’ve noted time and again though, with crude output springing higher from non-OPEC nations, and a slowing global economy threatening to hit demand as well, signals of a significant and lasting market oversupply are in danger of increasing. Oil prices have already tracked sharply to the downside since late October on the back of these fears, and further heavy weakness could be in the offing for 2019.
As a consequence, the 7% earnings rise predicted at BP for 2019 stands on shaky foundations, I believe, as do any predictions of profits growth beyond next year. The oilie’s a risk too far, in my opinion, and there are much safer dividend stocks to be found on the FTSE 100 today.
