Can Vodafone Group plc, Centrica plc and Pearson plc afford to pay their chunky dividends?
Today I'll be examining three high-yielding income stocks from the FTSE 100 whose generous dividend payouts are looking increasingly exposed to future cuts. Can industry giants Vodafone, Centrica and Pearson really afford to reward their shareholders with such generous dividends?
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Earnings shortfall
Mobile telecoms giant Vodafone(LSE: VOD) has always been a firm favourite with investors seeking a reliable rising dividend coupled with lower levels of risk. However, keen observers will have begun to notice that its generous dividend payouts have continued to rise in recent years despite a slide in earnings that began in 2013. What's more, the pre-tax loss of £449m reported for the full-year to 31 March, coupled with the £1.2bn fall in revenues, will have done little to alleviate growing concerns over the sustainability of future payouts.
Granted, the group is expected to turn things around, with brokers predicting a 36% rise in profits for the current financial year to March 2017.
But these projections will lift underlying profits to £1.8bn and earnings per share to 6.83p, still well short of the 11.92p forecast dividend payout. No doubt Vodafone will continue to dip into its reserves and reward its army of long-term shareholders, but unless there's a steep rise in earnings over the coming years, I expect more investors, analysts and indeed writers like myself to sit up and take notice of the earnings shortfall.
Customer exodus
Like Vodafone, gas and electricity supplier Centrica (LSE: CNA) has always been a classic income share with almost-uninterrupted dividend growth. But all that came to a halt in 2014, when pre-tax losses of £1.4bn and a 32% fall in earnings led to a cut in the dividend payout from 17p to 13.5p. A further cut was to follow in 2015, when the company suffered a pre-tax loss of £1.1bn, and the dividend was slashed further to 12p. Unfortunately, things still aren't looking too great in 2016. Interim results have revealed a 12% decline in operating profits as the company lost 399,000 customers to alternative suppliers.
The owner of British Gas has partly blamed the exodus on the large number of customers coming to the end of fixed-term contracts, but nobody can deny that more people are shopping around looking for a better deal. Management has hiked the interim dividend from 3.57p to 3.6p and an improved payout of 12.25p is expected for the full year to December, giving a healthy 5.1% yield at current levels. However, with earnings per share predicted at just 15.15p this year, the dividends are covered less than 1.3 times by forecast earnings and are looking less secure.
Dividends exposed
Publishing group Pearson (LSE: PSON) has also reported disappointing first half results with a widening of pre-tax losses to £306m from £132m, and sales down by £131m to £1.86bn. The media firm continues with its restructuring and cost-saving measures while transitioning away from print-based to digital content. Meanwhile, the already hefty dividend is expected to increase again this year to 52.04p, leaving the yield at almost 6%. But with earnings predicted to fall by 21% to just 55.55p per share, future payouts are looking increasingly exposed.
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
