Is Barclays PLC Contemplating A Dividend Cut?

It seems as if Barclays (LSE: BARC) (NYSE: BCS.US) can’t get anything right. The bank is facing a constant stream of fines and accusations of wrong doing. Additionally, Barclays is trying to grapple with its own internal troubles, including the unwinding of its ‘bad bank’, a portfolio of unwanted toxic assets, and restructure the investment banking division, which is proving difficult. 

But as the bank struggles, there’s a chance that management could be forced to slash the dividend payout in order to save cash. 

Fine time 

Of course, the biggest issue facing Barclays at present is the prospect of hefty fines from regulators. City analysts believe that the bank could be facing around £2bn of fines and legal costs during the second half of the year.  

The prospect of hefty fines threatening the dividend payout was exactly the reason why revered fund manager, Neil Woodford sold his HSBC (LSE: HSBA) holding. And he was right, as HSBC was slapped with a $500m mortgage mis-selling fine just after Woodford revealed his reasons for selling. 

What’s more, HSBC’s earnings are under pressure as the bank faces rising compliance costs, even as it slashes costs in other departments. Indeed, during the first half of this year HSBC reported that it is now spending $750m to $800m per year on its compliance and risk programme, an increase of $150m to $200m from last year. Management blamed rising compliance costs as the reason for the 4% rise in underlying operating expenses.

Under pressure 

All in all, with costs rising HSBC’s earnings are coming under pressure. The bank’s earnings per share fell by around 8% during the first half and as a result, dividend cover fell from 1.9 times to 1.7 times, decreasing the amount of room HSBC has to hike the payout.

Barclays’ dividend cover ratio has also been falling, as the bank’s underlying earnings fall. Specifically, during 2012 the bank’s dividend per share of 6.5p was covered just under six times by earnings per share. However, the company’s earnings per share fell to 16.7p last year, implying a dividend cover of 2.6 times. 

That being said, City analysts expect Barclays’ dividend payout to be covered around three times by earnings per share next t year. This forecast is on an underlying basis and excludes the effect of any fines or one-off charges the bank may be forced to take. City forecasts currently expect management to raise the dividend payout by 5%, giving Barclays a yield of 3% at current levels. 

Share payout 

Meanwhile, Standard Chartered’s (LSE: STAN) dividend payout appears to be safer than that of its peers. Indeed, over the past few years the banks has paid the majority of its dividend in script form, in other words, issues shares instead of dipping into profits.

To some extent, a high script take-up should safeguard the dividend payout, it certainly worked for peer, Santander, which managed to maintain a high dividend payout throughout the financial crisis as the majority of the payout was issued in script form. Standard Chartered is expected to support a yield of 4.6% next year and City analysts expect the payout to be covered twice by earnings per share.