Rio Tinto
Shares in Rio Tinto (LSE: RIO) have fallen by 27% since the start of this year, causing its dividend yield to rise to 6.3%. Iron ore, which accounts for almost 90% of Rio’s underlying earnings, has been one of the worst hit commodities. The price of iron ore has fallen by almost 40% since the start of this year, and analysts continue to be pessimistic with its outlook, as the growth in supply continues to diverge with the trend for demand.
The three largest iron ore producer, Rio Tinto, BHP Billiton (LSE: BLT) and Vale have massively increased production even as prices slump, as they seek to defend their market share. To combat the declining margins, producers have invested in improving their infrastructure and productivity to drive production costs lower. But the rate at which production costs is getting lower does not seem to match the rate of the falls in the market price of iron ore.
Looking ahead, analysts expect slowing steel consumption in China would mean the worse could still be yet to come for iron ore prices. Rio Tinto’s dividend cover is safe for now, as its dividend cover is forecast to be 1.1x this year and its net debt to EBITDA ratio is just 0.64. But with the pessimistic outlook on iron ore, its longer-term dividend sustainability is in serious doubt.
Vodafone
Over the past few years, Vodafone (LSE: VOD) has had to contend with tough market conditions and the impact of regulatory changes in Europe. Prices have generally been falling as a result of intensifying competition, and the reduction in mobile termination rates (MTR), the fees that mobile networks charge for handling incoming calls, have hit larger networks more than smaller ones.
However, we are beginning to see the initial signs of a bottoming in the market. Price competition appears to be beginning to ease in much of Europe, most notably in Italy, with the rate of declining service revenue slowing and improvement in churn rates. Organic group service revenue in the quarter to 30 June grew at the fastest rate for almost three years, increasing by 0.8 percent.
Analysts expect Vodafone’s earnings is set to bottom out by 2016/7, with underlying EPS forecast to fall by 5% this year to 5.3p, before increasing 19% in the following year, to 6.3p. Vodafone’s 5.2% dividend yield is still a long way from being covered by its earnings and free cash flow, but the positive trends in revenue and earnings and the company’s low level of indebtedness should mean investors have little to fear for now.
Carillion
Carillion‘s (LSE: CLLN) shares currently yield 5.9%. Delays and cost overruns have hit the margins for the support services group over recent years, causing earnings to decline by 16.5% over the past two years. But, the company has since been moving away from lower margin construction business to focus on infrastructure services, where demand has been steadily growing and probability is more predictable.
Carillion’s dividend is secure, with a forecast dividend cover of 1.9x. The company benefits from robust free cash flow and a strong backlog of firm and probable orders worth £17.1 billion, which covers more than 4 years of the firm’s revenues. Analysts expect Carillion’s underlying EPS this year to be broadly flat on 2014, at around 33.7p, which means its shares trade at a forward P/E of just 9.1.