In today’s article I’ll look at the dividend situation for investors in Amec Foster Wheeler (LSE: AMFW), Admiral Group (LSE: ADM) and Carillion (LSE: CLLN).
All three firms offer tempting 6% dividend yields. Is now a good time to buy, or could some of these dividend payouts come under pressure over the next six months?
Amec Foster Wheeler
Oil and energy services firm Amec Foster Wheeler trades on a forecast P/E of just 10.6. Forecast 2015 earnings per share of 67.3p should cover the expected 43p dividend by 1.6 times, giving a potential yield of 6%. However, I’m not sure how safe Amec’s generous dividend really is.
Amec’s most recent accounts show that the firm’s interim pre-tax profits fell from £83m last year to £73m this year, despite the inclusion of Foster Wheeler earnings in this year’s figures. Net debt rose from £803m to £957m during the first six months of the year, and the firm reported a cash outflow of £9m from its operations. Amec’s operating margin has fallen from 6% in 2013 to just 3.7% last year, and the firm expects further pressure on margins this year.
In my view Amec’s dividend could become increasingly hard to afford unless market conditions improve in the oil and gas sector. I think there are better buys elsewhere.
Admiral Group
City forecasts currently suggest that motor insurer Admiral will pay out a whopping 96.4p per share in dividends this year, giving a prospective yield of 6.0%. After a tough couple of years for UK car insurers, Admiral’s pre-tax profits rose by 1% to £186.1m during the first half of the year. Customer numbers were up by 6% to 4.19m and the interim dividend was increased by 3% to 51p.
City analysts are becoming steadily more bullish on Admiral. Over the last three months, consensus forecasts for the 2015 dividend have risen from 89.1p to 96.4p per share. Earnings forecasts have risen from 92.3p to 99.7p per share.
These forecasts suggest to me that big investors believe momentum is returning to Admiral’s business. I suspect that the firm’s 6% prospective yield is pretty safe this year.
Carillion
Engineering and construction group Carillion is one of the biggest UK listed stocks in its sector. I believe it may be one of the most attractive to buy, as well.
Carillion shares currently trade on a 2015 forecast P/E of 9.0 with a prospective yield of 5.9%. The firm’s net debt of £199.5m is relatively modest when compared to last year’s operating profit of £200m, and should not cause any foreseeable problems.
Carillion is also more profitable than some of its smaller peers, with an operating margin of about 5%. This compares well to margins of about 2.5% at Costain and 1.8% at Kier, for example.  However, investors may want to keep an eye on Carillion’s £456m pension deficit, which required £46m in top-up payments last year, and has absorbed £22m so far this year.
Forecasts suggest that Carillion’s earnings per share and dividend payout are likely to be broadly flat next year. I suspect the shares rates as a reasonable hold, more than a compelling buy.