Even when a dividend cut has been heavily trailed, it always comes as a shock when it finally happens. That’s certainly the case with Tesco (LSE: TSCO).Â
People knew the survival of the dividend was in doubt, but that didn’t stop the share price from plunging sharply on the day. What made it worse was the scale of the cut, a brutal 75%. Few expected something quite so drastic.
New boss Dave Lewis has a long way to go to restore investor confidence. Especially with the spectre of sectoral decline looming heavily.
Latest figures show wages rising at a meagre 0.6% a year. If Lewis does trigger another price war, he will have to cut deep to make hard-up shoppers feel like their money really is stretching further.
Axeman Cometh
Worse, even when the bad news had been absorbed, Tesco’s share price has continued to slide. Which should worry anybody holding shares in BP (LSE: BP) (NYSE: BP.US) and HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US), because both companies have an axe hovering over their dividends.
The blow would be particularly bitter for BP investors, as its dividend was only restored recently, after being axed in the immediate wake of the Deepwater Horizon tragedy.
Now it is under threat again, following the recent US district court ruling that found BP guilty of “gross negligence” paving the way for another $18bn of fines.
BP is going to appeal, but if it loses its profits will inevitably take a hit, and investors will foot the bill, as its dividend and share buyback programme may be scaled back or possibly even scrapped.
Analysts are already predicting that BP’s cash flow could be flat over the next few years at around $31bn. That should be enough to cover its $25bn capital expenditure programme, but leaves little scope for dividend progression.
We may learn more next month, when BP posts its Q3 results. But the US appeal will no doubt drag on, and continue to cast a shadow over BP’s share price.
Today’s duty 4.8% yield can’t be relied on.
I Feel Fine
Ace dividend investor Neil Woodford was the first to publicly raise the danger of HSBC being forced to cut its dividend, as a result of regulatory “fine inflation”.
He thought the risk was so great, he dumped the stock, the last remaining bank he was holding.
Since HSBC is the world’s largest banking and financial services group, it is most at risk from fine inflation if regulators set their penalties according to company size.
Woodford warned that an ongoing investigation into the historic manipulation of Libor an foreign exchange markets, serious offences if found true, could hit HSBC’s ability to grow its dividend.
All the banks face a ceaseless flow of fines, especially from the US, which continue to eat away at profits. Only last week, HSBC agreed to pay $550m to settle a lawsuit filed in 2011 by the Federal Housing Finance Agency, over mortgaged-backed securities sold in the run-up to the financial crisis.Â
HSBC’s dividend, currently yields 4.5%, covered 1.7 times, was already said to be under threat, following last month’s disappointing interim results, which showed a 12% drop in reported pre-tax profits to $12.3bn.
Now it is in even greater danger.
Shock Doctrine
While I wouldn’t expect HSBC to slash its dividend by as much as 75%, future growth could be disappointing. BP’s dividend is in the lap of the legal gods.
Anybody considering buying these two companies must brace themselves for a shock.