Could BP plc, HSBC Holdings plc & GlaxoSmithKline plc Be Next To Cut Their Dividends?
Income investors are feeling the squeeze as almost a fifth of all FTSE 100 companies have announced dividend cuts over the past year or so. Even companies which have previously been considered as safe and reliable investments, such as Tesco, Centrica and Severn Trent, were unable to maintain their dividend payouts after reporting sharp declines in earnings. And so far into 2016, 3 high profile dividend cuts have already been made, namely BHP Billiton, Rio Tinto and Barclays.
Here are 3 high yielding blue-chip stocks that could be next to cut their dividends:
BP's (LSE: BP) earnings, which more than halved in 2015, are putting its 7.4% dividend yield in perilous territory. Underlying earnings covered just 80% of its dividend in 2015, but what's worse is the company's free cash flow position.
The company's $18.6bn capex budget in 2015 was only just about covered by operating cash flow of $19.1bn, leaving an overwhelming majority of its $6.7bn dividend funded by new borrowings. The rapid growth in net debt, which rose 20% in 2015 alone and totalled $27.2 billion at the end of the year, demonstrates that with current oil prices, its existing dividend policy is unsustainable.
BP cannot afford to wait for oil prices to recover, and should act quickly to protect its balance sheet by cutting dividends soon. Oil prices do not seem to have much further to fall, but they are unlikely to bounce back any time soon. The shale revolution in North America has changed the dynamics of the energy market for good, and so the lower oil price environment appears to be the new normal.
BP's dividend futures, which are exchange traded derivative contracts that allows investors to take positions on future dividend payments, are pricing in a 17% dividend cut in 2016, which indicates just a modest probability of a dividend cut this year. But for 2017, BP faces a bigger risk of a dividend cut, with a 40% dividend cut being priced in by the markets.
Over the past year, two UK banks - Standard Chartered and Barclays - have come to announce big dividend cuts, following weaker than expected earnings and increased restructuring costs. HSBC(LSE: HSBA), which has long been suffering from weak profitability, could be the next bank to cut its dividend.
Earnings per share (EPS) for the bank have fallen year-on-year for the past two consecutive years now, from $0.84 in 2013, to $0.65 in 2015, whilst dividends per share have increased from $0.49 to $0.51 over the same period. This meant dividend cover has fallen from over 1.7x, to currently less than 1.3x.
HSBC's dividend futures are pointing to a 10% and a 18% cut in its dividend in 2016 and 2017, respectively, which puts the bank at a substantially lower risk of dividend cuts. But, with uncertainties coming from slowing growth in emerging markets and a negative earnings trend, HSBC's shares still appear to be a risky income investment.
GlaxoSmithKline(LSE: GSK) is the least cyclical of the three stocks mentioned here, which should also mean it is the safest. However, recent patent expirations for its major blockbuster drugs and intense competition from generic manufacturers have had a serious impact on revenues and earnings.
As a result of weak earnings, GSK has frozen its dividend at 80 pence per share for each year until 2018. But, despite the dividend freeze, GSK is unable to fully cover its dividend. A 15% drop in core EPS in 2015 caused its dividend cover to fall to just beneath the 1.0x mark in 2015.
Fortunately, for the drug company, the longer-term outlook is more positive. GSK benefits from an impressive pipeline of 40 new drugs, and already green shoots of recovery are becoming visible. New products accounted for £2 billion of sales in 2015, with signs of strong quarter-on-quarter growth rates. Looking forward, GSK expects £6 billion of sales will come from these new products by 2018, offsetting much of the impact of expiring blockbusters.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.