Today I’m looking at the dividend outlook of two blue-chip giants.
Bank on brilliant dividend growth
Banking goliath Lloyds’ (LSE: LLOY) massive downscaling post-recession has seen its appeal as a hot growth prospect dwindle.
But while asset sales and a renewed focus on the high street have undermined its revenues outlook, Lloyds’ new emphasis on bolstering its low-risk operations makes it much more stable in the dividend stakes, I believe.
While unexciting profits prospects could be viewed as a bad omen for future payout growth, in the case of Lloyds I believe the exceptional progress of the firm’s ‘Simplification’ cost-cutting plan should drive dividends higher in the years ahead.
The programme helped push operating costs down by another 1% between July and September, to £6.07bn, and Lloyds isn’t set to take its foot off the gas any time soon. Indeed, it said last week it was slashing another 1,755 jobs alongside 29 branches in its ongoing expense-cutting drive.
These measures have already boosted Lloyds’ capital strength, and the bank boasted a terrific CET1 rating of 13.7% as of September, up from 12% a year earlier.
And while the cost of the PPI scandal remains a thorn in the side (Barclays Capital estimates Q4 provisions at Lloyds could reach as high as £2bn) I reckon Lloyds’ long-term costs picture remains strong, particularly should the FCA’s proposed claims deadline kick in during 2018.
In the meantime, the City expects Lloyds to raise a predicted full-year dividend of 2.4p per share for 2015 to 3.7p in the current year, producing an exceptional yield of 5.1%. By comparison, the FTSE 100 sports an average of roughly 3.5%.
Dividend set to sink?
Fossil fuel colossus BP (LSE: BP) confounded sceptics last week by keeping the quarterly dividend unchanged at 10 US cents per share, shrugging off catastrophic earnings.
The full-year payment clocked in at 40 cents per share, up fractionally from the previous year but still keeping the company’s progressive policy on track.
BP remained bullish that a combination of cost cutbacks and reduced capex should keep payouts generous. Chief executive Bob Dudley commented that this strategy “underpins our commitment to sustaining our dividend and then growing free cash flow and shareholder distributions over the long term.”
Still, the shocking scale of BP’s losses illustrates its challenging market conditions. BP slumped to a record annual loss of $5.2bn last year on a replacement cost basis, from a profit of $8.1bn in 2014. And losses in Q4 widened to $2.2bn from $969m.
And oil prices have slumped even further this year. Brent spent most of the fourth quarter trading between $40 and $50 per barrel, but the benchmark has spent much of this year around or below $35, even falling to its cheapest since 2003 ($27.67 per barrel) at one point.
Many brokers believe even more oil price pain is ahead as supply and demand indicators worsen. Record production from OPEC is heading higher as Iranian and Iraqi activity climbs, while US and Russian operators are refusing to dial down the pumps. Economic cooling in China isn’t helping to soothe bloated inventories, either.
With BP’s balance sheet still eroding fast (net debt surged 20% to $27.2bn as of December) further crude weakness could still wreak havoc on BP’s dividend policy.
The City expects the dividend to fall to 37 cents in 2016, creating a still-mighty yield of 7.2%. But should BP’s predictions for crude to reach $60 per barrel by next year fall flat, shareholders could be forced to swallow even larger dividend cuts.