Today I am looking at two dividend stocks standing on shaky foundations.
Digger to give in to gravity?
After a perky start to the final quarter of 2015, shares in diversified miner Rio Tinto (LSE: RIO) have once again struck the low notes and the London business has dived to fresh six-and-a-year troughs below £19 per share in recent days.
This hardly comes as a shock given the company’s worsening sales outlook. Iron ore — a market from which Rio Tinto sources almost three-quarters of underlying earnings — is set to remain swamped with excess material as China’s economy flails and producers remain committed to hiking output. The steelmaking ingredient fell to 10-year lows of $38.30 per tonne yesterday as a result.
And fresh falls appear on the cards as patchy macroeconomic and industry data continues to roll in. And troublingly for Rio Tinto, values of other revenues-critical commodities like copper, coal and aluminium also continue to sink.
The threat of worsening market balances is nothing new at Rio Tinto, however, and the business has lifted dividends at a compound annual growth rate of 18.8% since 2010 despite persistent bottom-line pressures.
And the City does not expect Rio Tinto to abandon its progressive policy any time soon — a dividend of 215 US cents in 2014 is expected to rise to 225 cents this year, yielding an exceptional 7.1%.
But the commodities sector is arguably facing a tougher outlook than ever before, and Rio Tinto can no longer rely on Chinese stockpiling to dig it out of the mud. Indeed, the company announced earlier this week plans to slash capex for 2015 to $5bn, down from its previous forecast of $5.5bn. And next year’s projection has been slashed to $5bn from an originally-planned $6bn.
Rio Tinto’s decision to cut guidance yet again indicates the increasing stress on the firm’s balance sheet — the digger saw net debt surge 10% year-on-year as of June, to $13.7bn. And with a forecast 48% earnings slide for 2015 leaving the dividend covered just 1.2 times, I reckon investors should be braced for a sizeable payout cut.
Energy giant running out of juice
And thanks to this increasingly-poor picture across the mining and energy arenas, I reckon Soco International (LSE: SIA) is likely to disappoint dividend seekers, too.
The City expects profits to sink for a third consecutive year at the fossil fuel explorer thanks to a tanking oil price, not to mention Soco International’s vast capital commitments. As a result a dividend of 15.58 US cents per share last year is expected to fall to 13.9 cents in 2015.
But this figure dwarves predicted earnings of 3.1 cents per share, and with worsening supply/demand dynamics expected to keep crude prices on the back foot, I would not be tempted to pile in despite a 6.8% yield. I believe rewards at Soco International could fall well, well short of current estimates.