Today I am looking at three FTSE plays in danger of dividend cuts.
BHP Billiton
Thanks to the steady pressure exerted across all commodity classes, I believe the previously-generous payout policy of BHP Billiton (LSE: BLT) could be set to take a battering. City consensus suggests otherwise, however, and the mining colossus is expected to shell out a reward of 121 cents in 2015, yielding an eye-popping 9.1%.
But with fellow resources plays like Glencore and Vedanta Resources having already put their dividends to the sword, the investment community is becoming increasingly-bearish over the income potential of the industry’s major players. Indeed, consensus suggested that BHP Billiton was set to lift last year’s payment of 124 cents until recent days, and brokers are increasingly waking up to the impact of lagging revenues and huge debts on future payments.
Analysts at Investec commented today that “ BHP Billiton is a victim of its own success, with the growth in its dividend over the past 15 years having now outpaced the company’s ability to deliver the requisite earnings to support it, chiefly in light of the rapid decline in commodity prices.”
Investec is not alone in calling for the firm to rebase its dividend in line with sustainable operating cash flows, and has called for a 25% dividend payout on said cash flows. I also believe a hefty reduction is an inevitability in the current climate, and that investors are likely to see yields at BHP Billiton topple.
De La Rue
Money printers De La Rue (LSE: DLAR) disappointed the market yet again in Tuesday business, forcing its share value to fresh record lows. The Basingstoke business advised that revenues slipped 5% during April-September, a result that sent underlying pre-tax profit shuttling 38% lower to £12.8m.
De La Rue has vowed to undertake a “root and branch” at its Cash Processing Solutions arm following the results, a decision that could see the firm hive off its cash sorting machine operations. But with competition in the industry hotting up, and technological advances resulting in an increasingly ‘cash-less’ world, troubles at this division are far from De La Rue’s only problem.
In light of an expected 22% earnings slump in the year to March 2016 — the second successive drop, if realised — the City expects De La Rue to keep the full-year dividend locked at 25p per share. I would not be tempted by a 5.6% yield, however, as the prospect of prolonged bottom-line weakness could see dividends at the printer take a huge whack.
Soco International
Like BHP Billiton, the number crunchers expect dividends over at Soco International (LSE: SIA) to fall foul to worsening supply/demand imbalances across commodity markets. At present the fossil fuel play is predicted to reduce 2014’s reward of 15.6 US cents per share to 13.8 cents in the current period, although many will still be drawn in by the gargantuan 6.6% yield.
Soco International has furnished the market with full-year production upgrades in recent times, and the London-based business was at it again last week thanks to bubbly production at its H5 project. The company now expects 2015 output to clock in at between 11,800 and 12,000 barrels per day, up from its previous estimate of 11,000 to 12,000 barrels.
But this could not prevent investor sentiment from sinking as Soco International commented that “current oil price uncertainty and potential capital commitments” could see it re-evaluate cash returns to shareholders. So with global supply ramping up and demand remaining subdued, I believe income seekers could end up severely disappointed.