These are worrying times for income investors. The threat of an economic downturn that could dwarf the Great Recession is spooking even the biggest and most financially-secure companies. As a consequence, even FTSE 100 companies that haven’t already been badly damaged by the Covid-19 crisis are cutting dividends.
A number of British blue chips have pledged to keep on paying dividends despite the tough economic outlook. But it’s likely that more FTSE 100 firms will be added to the list of dividend axers, suspenders, or reducers as 2020 progresses. What can investors expect the following Footsie plays to do in the weeks and months ahead?
10% dividend yields!
BP’s become a lightning rod for speculation over where the next FTSE 100 dividend cut will come from. A chorus is growing among City analysts that the oilie’s about to pull the trigger following the crude price crash. Cash flows and profits have dived while its colossal debt pile is swelling. It already has a monster $50bn-plus of net debt to service.
In anticipation of a prolonged downturn in oil demand, BP this month announced plans to cut 10,000 roles from its global workforce. It’s the first in what will be many steps to save cash, one of which I’m sure will include slashing dividends. And sooner rather than later, too. This is why I care not for the company’s near-10% yield. It’s a matter of time before BP follows its FTSE 100 rival Shell in reducing shareholder payouts.
Under pressure FTSE 100 stocks
BP isn’t the only Footsie share that investors need to be careful with, however. Pearson has kept its previous dividend pledges but I think it’s only a matter of time before the educational materials supplier bites the bullet. Major structural issues, like falling student enrolments and the rise of free education tools, mean that revenues keep falling. Debt here, meanwhile, continues to climb too.
Those fundamental problems in its markets would discourage me from buying Pearson and its 3%-plus dividend yield. I’d be much happier to buy shares in The Berkeley Group, a FTSE 100 housebuilder that should benefit in the coming years from London’s huge homes shortage. I wouldn’t buy it on account of its near-term dividend outlook, though.
Current payout forecasts create a massive 6% dividend yield, but I reckon Berkeley could disappoint big time. Toughening economic conditions that could smack homebuyer demand in 2020 and 2021 are one thing. Lenders making the process unaffordable for many potential buyers by hiking deposit requirements threatens to hit sales of Berkeley’s products, too.
FTSE 100 rivals Taylor Wimpey, Persimmon, and Barratt have all reined in their dividend plans following the Covid-19 crisis. And it’s a matter of time before Berkeley follows suit, in my opinion. Income investors need to be extremely careful in the current macroeconomic climate, clearly. But they don’t need to panic. There remains a multitude of great Footsie dividend shares to snap up today.