Are these Footsie big yielders doomed to fail?

The Motley Fool
Centrica, Gas ring burning
Centrica, Gas ring burning

Rising troubles on the high street make me concerned that Marks & Spencer(LSE: MKS) may struggle to keep its freshly-restored, progressive dividend policy up and running.


The British retail institution got dividends chugging higher again in 2015, Marks and Sparks' improved earnings outlook giving it the confidence to splash the cash on its shareholders once more. But I reckon worsening industry conditions since then could see the company retreat back into its shell.

On Monday Kantar Worldpanel advised that the UK's fashion retail sector experienced four months of decline in the year to September 25, the biggest drop for six years. Nearly £700m has been wiped from the value of the market from the same point last year, the research house advised, as retailers chase shoppers through profits-sapping price reductions.

Against this backdrop, the City expects Marks & Spencer to endure another 14% earnings decline in the period to March 2017 as its fashion offer is left on the rails. Despite this, a dividend of 20.8p per share is currently predicted, up from 18.7p last year.

I reckon this prediction is in severe peril of missing the mark, particularly as dividend coverage stands at 1.5 times, some way below the safety watermark of two times. A prospective yield of 6.2% is simply too good to be true, in my opinion.

Switching surges

Latest data from Energy UK underlines the huge obstacles Centrica (LSE: CNA) faces to stop its customer base slipping through its fingers.

The trade association announced that switching activity has picked up again in recent weeks, with 376,511 homesteads changing supplier in September, up 21% year-on-year. And Energy UK noted that a third of the total changed to a small- or mid-tier power provider, a terrifying statistic for 'Big Six' constituents like Centrica.

The country is awash with promotion-led suppliers, with 40 now in operation and steadily taking chunks out of the established players' customer bases. Centrica itself saw the number of homes on its British Gas books slip a further 3% during January-June.

And these pressures are likely to worsen in the months ahead as a backcloth of rising inflation puts household budgets under the cosh.

But this isn't the energy giant's only problem, of course, with a steady rise in US and Russian oil production putting earnings forecasts for its Centrica Energy arm under severe scrutiny. Should a fragile OPEC agreement to curb production fall through in November then crude values look likely to sink again.

Heavy bottom-line pressure has forced Centrica to reduce the dividend in each of the past two years. But despite another expected earnings dip this year -- this time by 11% -- the energy colossus is predicted to raise the payment, to 12.3p per share from 12p in 2015.

Many will undoubtedly be drawn in by a vast 5.7% yield. However, I'm afraid meagre dividend coverage of 1.2 times, in unison with its £3.8bn net debt pile, makes me highly suspicious over whether Centrica can meet these lofty expectations.

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Royston Wild 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.