If you like pocketing handsome dividends (and who doesn’t?), you should be buying high-yielders when their share prices are low rather than submitting to the current panic and running for the hills. Shouldn’t you?
Of course, there’s always the risk that the dividend will have to be cut and that’s a large part of the reason Anglo American (LSE: AAL) shares have been allowed to slip so far that they’re on a forecast yield of 12% for 2016. And the City still has a massive 16% pencilled-in for the year just ended.
Such yields have come from an 80% crash in the Anglo American share price since February 2015, to 240p. Earnings per share at the troubled miner have fallen for three years in a row, and there’s a massive 57% drop expected for 2015, followed by a forecast 36% drop in 2016 — so those dividends would be nowhere near covered.
In this case, Anglo’s dividends are surely not going to improve, but with a forward P/E of under eight predicted for this year, are we still looking at a clear high-yield recovery situation? Sadly not, as Anglo’s big problem is its very high net debt of $13bn (and it has a market cap of only around $4.8bn). Takeover, asset stripping, equity dilution — any of these could happen before things have a chance to get better.
Exposed bank
Do you fancy the 7.1% dividend yield forecast for 2015 and 2016 from HSBC Holdings (LSE: HSBA), after its share price has plunged 27% since April 2015, to 470p?
Well, if this was your average high street bank I might be tempted, even though dividend cover wouldn’t be strong. We’re looking at around 1.5 times, while I think banking dividends need to be covered at least around twice by earnings to start to look safe. HSBC’s history of keeping the cash flowing is in its favour, but the obvious big issue is China. If the feared hard landing happens, HSBC could take a serious hit through bad loans — just like the banks did here in the West.
Dividend yields this high from a bank suggest there’s little confidence in their sustainability. HSBC is a big no for me right now, but if it comes through the crisis then it could become a good long-term dividend investment again.
Safety in insurance
Legal & General (LSE: LGEN) is a different case altogether, though a 20% share price fall since March last year, to 233p, has boosted the potential 2015 dividend yield to 5.8%, with 6.1% forecast for 2016.
But Legal & General has enjoyed three years of rising earnings, with two more forecast and that’s dropped the forward P/E down to around 11.5. I think that’s underpriced for a strong insurer that has been recovering well from the financial crisis, especially after November’s Q3 update revealed an 11% rise in operational cash generation and all key metrics heading in the right directions.
My only caution is that the dividend isn’t well covered — only about 1.4 times by forecast earnings in 2016. That’s most likely sustainable in the current climate, but I prefer a more conservative dividend approach based on conserving capital in case of longer-term hardships. I still think Legal & General is a solid investment, mind.