Today I’m running the rule over three dividend favourites with what I believe are widely differing prospects.
Driller on the rocks
For the uninitiated, Shell (LSE: RDSB) may appear the dream ticket for those seeking abundant dividend flows. The fossil fuel colossus has lifted payments at a compound annual growth rate of 3.2% during the past five years alone, with electric cash flows offsetting the problem of earnings turmoil during this period.
But I believe the sea change currently affecting the oil industry makes Shell a much more risky proposition looking ahead. Global crude inventories currently stand at record highs above three billion barrels, according to the International Energy Agency, and relentless OPEC pumping threatens to send these levels steaming still higher.
City consensus suggests that Shell will cut the dividend fractionally in 2015, to US182 cents per share, although this still yields a whopping 7.7%. Still, this payment actually exceeds projected earnings of 177 cents.
With crude prices steadily worsening, and Shell’s purchase of BG Group putting huge stress on its already-stretched balance sheet, I believe dividends could disappoint this year and beyond.
A chilly payout picture
Like Shell, I believe electricity and gas provider SSE (LSE: SSE) is a precarious dividend selection. The utilities space may have been a happy hunting ground for savvy income hunters for donkey’s years, but an increasingly-tough regulatory environment (combined with the relentless rise of independent suppliers) is hampering earnings visibility like never before.
SSE reported that the number of households on its books continued to slip between April and September. Total dual accounts fell to 8.41 million as of the end of the period, from 8.58 million in March, a big reduction from 8.9 million accounts in September 2014.
With SSE also having to battle escalating operational costs, I believe the supplier could see its progressive dividend policy come under increasing pressure.
Sure, City projections of a 90.2p per share dividend for the year to March 2016 create an exceptional 6.3% yield. But an anticipated 8% earnings dip indicates the mounting troubles facing SSE, a troubling omen for dividends in the coming years.
Dividends motoring higher
With British motor premiums steadily improving and the company’s performance in Europe and the US firmly on the up, I believe that motor insurance giant Admiral (LSE: ADM) should put recent earnings woes behind it and keep its dividend policy chugging along nicely.
The latest British Insurance Premium Index from motoring organisation AA showed the average car insurance quote at £569 between July and September. This was up 4.8% from the prior quarter and represented a huge 9.2% advance from the corresponding 2014 period.
Of course, Chancellor George Osborne’s vow to get tough with personal injury claims could see this upward trajectory slow markedly. Still, the era of low insurance prices appears to be a thing of the past as the entire industry becomes increasingly committed to hiking insurance costs.
Analysts expect Admiral to fork out a dividend of 96.2p per share in 2015, yielding a terrific 6%. And I believe the insurer should continue to churn out market-beating dividends as the bottom line gradually improves.