For years now Next (LSE: NXT), supported by an excellent record of earnings growth, has furnished investors with meaty dividend increases. But as conditions on the UK high street become ever-more-difficult, the clothing colossus may have to put this generous policy to the sword.
So while Next is expected to carve out a marginal dividend increase for the period to January 2017 — to 159.1p per share from 158p in the prior 12 months — the City expects increased top-line pressures to feed through to a rare reduction further out.
Indeed, the number crunchers have chalked-in a reduction to 157.4p in the current fiscal period, although this still creates an impressive 4% yield. However, the strong possibility of bottom-line downgrades as the year progresses could result in an even-larger payout cut, not to mention additional cuts in the coming years.
Fellow fashion retailer New Look echoed the difficulties facing the industry this week when it announced a 4.7% decline in UK like-for-like sales during the 13 weeks to Christmas Eve. Chief executive Anders Kristiansen noted that âthe UK market has continued to be extremely challenging, with reduced footfall and a highly promotional environment on the high street,â adding that he expects 2017 to remain âtough.â
Against this backcloth it’s difficult to predict the timing of any sales snapback at Next, the firm having reported a 0.4% slide in full-price sales during the 54 days to December 24.
I reckon a combination of falling consumer confidence, the slowing growth of the companyâs Next Directory online division, and the prospect of hefty rises in its cost base make Next a gamble too far.
Dividend dud?
I also believe the possibility of the oil glut lasting longer than expected makes BP (LSE: BP) a precarious pick for income-chasers.
Rather than maintain its charge above the $50 per barrel marker after OPECâs output freeze was ratified in November, the Brent benchmark has been unable to print further gains as the threat of exploding US production hangs heavy.
Fresh data from rig counter Baker Hughes showed the number of operating units in the country rising for the 13th week out of 14 in the seven days to February 3, with 583 rigs now representing the highest level since October 2015.
And the numbers are likely to keep swelling as North American producers become accustomed to churning out profits at current oil prices, undermining the probability of earnings bounce-backs at the likes of BP.
The City expects the dividend to remain at 40 US cents per share in 2017, with massive asset sales and cost reductions helping ease the burden on its battered balance sheet.
But the firmâs longer-term dividend outlook remains less assured as rising US production looks set to keep the market imbalance in business, particularly if production curbs by OPEC and non-OPEC members subsequently collapse.
I therefore reckon the risks associated with BP remain too high, in spite of the firmâs 6.8% dividend yield.