Are these monster yielders a risk too far?

The Motley Fool
Petrofac oil pipes
Petrofac oil pipes

Electronics builder Laird (LSE: LRD) has endured a torrid time in 2016. The company's share price was already on the back foot leading up to October's trading statement. But news that its Performance Materials division had endured a "very challenging trading performance" during the third quarter, and Laird's subsequent profit warning, has really put the boot in. The stock remains locked around five-year lows.


Laird noted last month that "the much slower production ramp, pricing and margin pressures and the overall lack of visibility in the Mobile Devices market" has weighed on trading activity more recently.

And market saturation in the smartphone sector suggests that the component builder could keep on struggling.

Recent share price weakness has seen dividend yields leap at Laird. So while the City expects the payout to fall to 11.3p per share in 2016 from 13p last year -- and again to 11.2p in 2017 -- these figures still yield a market-smashing 8.1% and 8% respectively.

However, I believe investors should be braced for more painful dividend cuts than those currently forecast.

A predicted 34% earnings decline in 2016 leaves the projected dividend covered just 1.3 times, well below the safety threshold of two times. And despite a predicted 17% turnaround next year, the assumed payout remains covered just 1.5 times by predicted earnings.

I reckon the prospect of any sort of bottom-line recovery is far from assured given the difficulties in Laird's key markets, a scenario that could leave Laird's dividend policy in tatters.

And with the firm also seeing net debt ballooning to £263.1m as of June, thanks in part to the acquisition of automotive technology specialist Novero in 2015, I believe current yields are looking very top heavy.

Pipe dreams?

Oilfield services provider Petrofac (LSE: PFC) is another FTSE 250 play whose dividend outlook is far from assured.

The abacus bashers expect the business to keep the full-year payment locked at 65.8 US cents per share in 2016, creating a dividend yield of 6.4%. And the reward is anticipated to edge to 67.3 cents the following year, nudging the yield to 6.6%.

However, the poorly state of the oil market makes me question whether Petrofac will be in a position to get dividends chugging higher again.

The company warned in August that "there have been few project awards in our core markets in the year to date," a trend that saw Petrofac register orders of just $1bn during January-June.

And like Laird, Petrofac has the added problem of a mounting debt pile to contend with. Net debt rose to $877m as of June, surging from $686m a year earlier.

I believe investors should err on the side of caution and resist the temptation of Petrofac's big yields. Indeed, a flurry of fresh capital expenditure cuts from producers across the oil industry in recent weeks suggest that more top-line turbulence could be just around the corner.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.