The current market downturn has thrown up some very large and tempting yields.
For example, BP (LSE: BP), Fenner (LSE: FENR) and Ashmore Group (LSE: ASHM) all currently offer a forecast yield of about 7%.
Is now the time for to stock up on cheap, high-yield shares, or is the risk of dividend cuts too high at the moment?
BP
When BP announced its interim results on 28 July, investors were watching closely to see if the firm would cut its generous dividend, which currently offers a 7.0% yield.
BP’s decision to leave the dividend unchanged gave its share price a brief lift, but the shares have since fallen by another 5%, as the price of oil has continued to fall.
The question now is whether BP can maintain its payout.
Profits from the firm’s refinery business have been boosted by low oil prices, and rose to $3.7bn during the first half of this year. That’s more than double the $1.7bn reported for the same period last year.
However, this wasn’t enough to offset the $7.1bn drop in profit reported by BP’s upstream (oil and gas production) division over the same period.
Consensus forecasts suggest that 2015 earnings per share of 39 cents will not quite be enough to cover BP’s forecast dividend of 41 cents per share.
The risk of a cut remains, but at this level of yield, I think BP remains a buy.
Fenner
Shares in Fenner have fallen by more than 20% over the last three months, pushing the firm’s prospective yield up to 7.0%, based on the forecast payout of 11.7p.
Fenner makes conveyor belts for coal mines and also produces products for the oil and gas industry. As you’d expect, the outlook is quite bleak. Earnings per share are expected to fall by 10% to 15.4p in 2015, and by a further 18% to 12.6p in 2016.
There is some hope, however. Many of Fenner’s products are essentially consumables which must be periodically replaced while mines remain in production. The firm also has customers in the industrial and medical sectors whose business is not affected by the commodity downturn.
Dividend cover could be tight in 2016, but even if the payout is cut slightly, I believe Fenner is an attractive long-term income buy at a good price.
Ashmore Group
Asset manager Ashmore has a particular focus on emerging market debt, equity and currencies. Many of these markets have slumped this year.
The firm says it has been finding good opportunities to invest in local currencies and that US dollar assets have also performed well, but Ashmore’s customers are not so confident.
Customer funds, known as assets under management (AuM) fell by $2.2bn, or 3.6%, during the second quarter. Further falls could cramp Ashmore’s earning power.
Consensus forecasts suggest that Ashmore’s earnings per share will fall to 18.2p in 2016, barely covering the forecast dividend payout of 17.3p per share. However, the firm remains highly cash generative and should easily be able to afford to maintain this payout.
Today’s top buy?
I believe that all three of the stocks in this article rate as a good long-term buy for income investors. All three have solid balance sheets and should be able to weather the current downturn without becoming financially distressed.