Today I am running the rule over three plump payout plays.
Racing ahead
Car insurance giant Admiral (LSE: ADM) cheered the market last week with blockbuster full-year results.
The business saw pre-tax profits canter 6% higher in 2015, to £377m, underpinning a 16% rise in the total dividend to 114.4p per share. And Admiral’s dividend outlook has become a lot brighter after the firm announced it will distribute around 65% of post-tax profits in the form of ordinary dividends, up from 45% previously.
Admiral has considerable clout in terms of retaining customers and attracting new business, with total account numbers surging 9% last year to 4.43m. This is also helping to power cash levels at the firm, with the insurer now boasting a “significant surplus” according to currency Solvency II capital rules, a brilliant signal for future dividends.
Consequently the City expects Admiral to fork out a total dividend of 108.7p per share in 2016, yielding a magnificent 5.7%. And I fully expect payments to keep marching higher along with earnings.
Commodities casualty
A backcloth of steadily-improving energy demand across the globe has helped to power dividends at BP (LSE: BP) for donkey’s years now.
However, the vast supply imbalance washing over the oil market means that doubts are growing over the oil sector’s ability to keep churning out market-bashing payments.
The EIA announced last week that it expects global crude stocks to grow by 1.6m barrels per day this year and by 600,000 barrels per day in 2017. The body commented that “these inventory builds are larger than previously expected, delaying the rebalancing of the oil market and contributing to lower forecast oil prices.”
BP is expected to snap from losses of 35.39 US cents per share last year to earnings of 17.5 cents in 2016, which is an optimistic projection in my opinion given the precarious state of the oil market. But even if earnings forecasts prove correct, such a figure is dwarfed by the predicted dividend of 40 cents.
A 7.8% yield may at face value appear too good to pass up on, but the likelihood of prolonged crude price weakness — combined with BP’s $27.2bn net debt pile — is puts dividends projections for this year and beyond in serious peril, in my opinion.
Bank on colossal returns
Like BP, banking goliath HSBC (LSE: HSBA) is also likely to suffer from the fallout of Chinese severe economic cooling in 2016 and potentially beyond. But unlike the oil colossus, I reckon earnings — and consequently dividends — at HSBC are on much safer ground.
All is not rosy in the garden, of course. On top of the prospect of near-term revenue problems, the threat of surging PPI costs as the proposed 2018 claims ‘deadline’ approaches provides a further headache for the company.
Still, I believe the impact of massive cost-cutting at HSBC should underpin the balance sheet in the near-term and safeguard upcoming dividends — the bank’s CET1 ratio stood at a healthy 11.9% as of December. And further out, the fruits of rampant population growth and rising income levels across Asia should power revenues and consequently payouts still higher, in my opinion.
In the meantime the City expects HSBC to fork out a dividend of 51 US cents per share in 2016, producing a barnstorming yield of 7.9%.