As miners and oil producers begin slashing dividends to shore up balance sheets, should investors of all stripes consider 4%-plus dividends at AstraZeneca (LSE: AZN), Carillion (LSE: CLLN), and Royal Mail Group (LSE: RMG)?
AstraZeneca's shares currently support a 4.6% yielding dividend covered 1.5 times by earnings. Cover will decrease through 2017 as revenue from blockbuster drugs Nexium and Crestor declines due to patent expirations, but this shouldn't be a major worry. Management's long-term goal of increasing revenue from $24bn annually in 2015 to $45bn by 2023 will require keeping institutional investors happy in the meantime. A dividend cut wouldn't be the way to maintain their good will, suggesting dividends should be safe for years to come.
The company has gone on a substantial shopping spree to reach this revenue goal and spent $10bn in the past year alone. Alongside increased R&D spend, these efforts could bear significant fruit in the long term for investors. Shares aren't a bargain at 15 times forward earnings, but an attractive yield and growth prospects shouldn't be scoffed at.
Construction and facilities management firm Carillion currently pays out a dividend yielding 6.9% covered 1.8 times by forecast earnings. With a dividend this high and shares trading at a mere eight times forward earnings, the shares certainly appear to be a bargain. However, the company is one of the most heavily shorted companies in the FTSE 350 due to concerns over mounting debt and lack of profit growth.
Over the past five years, revenue has fallen 17% and profits 15%. And although revenue finally returned to growth last year, earnings per share are forecast to be stubbornly flat in the near term. At the same time, debt has increased to three times earnings for a total of roughly £450m. Until management can return the company to reliable profit growth, I would avoid the shares as there remain safer dividends to be found.
Dividends at Royal Mail currently offer a 4.8% yield and are covered more than 1.5 times by forward earnings. The company is in the midst of a major restructuring effort as consumer habits shift dramatically. Letter volume, which still represents 60% of revenue, is falling steadily while package shipments increase precipitously. Unfortunately for Royal Mail, this growing market has attracted large international competitors, which will forestall massive profit growth.
Restructuring efforts should see Royal Mail's estimated 2% to 3% operating margin gap with international competitors narrow. Therefore, even if revenue continues to increase by only 1% per annum, as it did in the past year, there's room for profits to grow. Shares trade at a reasonable 12 times 2017 earnings and dividends have room to continue increasing incrementally. Royal Mail likely won't offer runaway share price appreciation, but a safe dividend and steady growth do make it an interesting option for income investors.
Unsurprisingly for a company that still makes most of its money from snail mail, Royal Mail is unlikely to see rapid share price growth anytime soon. For investors who are seeking more bang for their buck, the Motley Fool has just released this free report on A Top Small-Cap.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.