With its valuation now at its lowest level for over 25 years, is this fallen giant too cheap to ignore? I think it depends greatly on how patient prospective investors are prepared to be.

Shell shares beat expectations

Like it’s similarly-battered FTSE 100 peer BP, Shell shares have been deeply affected by the plunging oil price in 2020. Billions of dollars of assets have needed to be written off by the company. 

Today however, Shell surprised on the upside. Adjusted earnings came in at $955m for Q3. While nowhere near the $4.77bn achieved over the same period in 2019, this is still better than the $638m in Q2. It’s also above what the market was expecting. 

Shell shares’ tough outlook

As encouraging as today’s news is, it seems fair to say that Shell still faces an upward struggle. Indeed, things could actually get even worse before they get better.

The ongoing pandemic is clearly the biggest near-term issue Shell shares face. The recent rise in infections around the world (particularly in Europe) has forced governments to re-introduce lockdowns. Although these new restrictions aren’t expected to last as long this time, they will still have an impact on Shell’s business. Put simply, fewer vehicles on the road leads to lower fuel sales and lower demand for oil. This means lower profits at Shell. 

Second, there’s the push away from fossil fuels and towards greener forms of energy. For its part, Shell is planning to focus on commercialising hydrogen and biofuels as well as energy for electric vehicles. It aims to be a “net-zero emissions energy business by 2050 or sooner.“

Nevertheless, turning this £70bn tanker around will cost a lot of money and Shell will need to be ruthless. In September, it announced that up to 9,000 jobs would be cut to make $2bn of savings. I wouldn’t bet against more being let go in the future.

Dividend cut

Up until recently, Shell shares presented as a solid pick for income seekers. Not cutting your dividend since the Second World War has a habit of doing that.  

Since the arrival of Covid-19 however, Shell has been forced to reassess its priorities. Quarterly payouts have been severely chopped. Today’s $0.17 per share compares unfavourably with the $0.47 per share awarded this time last year even if it does represent a 4% increase on that returned for Q2.

Having approved a new ‘cash allocation framework’, Shell now intends to distribute 20-30% of its cash flow from operations to shareholders once it’s brought its debt down to $65bn from $73.5bn. So, dividends could keep rising from here but I don’t think anyone should underestimate the challenges ahead. 

Bottom line

With a tough outlook, Shell shares don’t feel like a compelling buy at the current time. Notwithstanding the fact that (like all stocks) it could rally like the clappers in the event of a vaccine breakthrough, I’d be inclined to look elsewhere in the FTSE 100 for my income fix. Those looking purely for big capital gains could be in for a long wait.

Royal Dutch Shell shares look cheap and yield almost 7%, but today’s gains may prove temporary.

The post Are Royal Dutch Shell shares now too cheap to ignore? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Recently however, dividend investing strategies have come unstuck. In the wake of the coronavirus outbreak, a whole host of FTSE 100 dividend payers have suspended their payouts. That means those who invest for divis have been left high and dry. Is it game over for dividend investors, then? Here are my thoughts.

Dividend crisis

There’s no doubt the coronavirus – a classic ‘black swan’ event – has resulted in a dividend crisis. In the space of around six weeks, over a quarter of the companies in the FTSE 100 index have suspended their payouts, which is unprecedented.

There are many big names on the list of dividend cutters. For example, Lloyds, HSBC, Barclays, Centrica, Glencore, and ITV have all suspended their payouts. 

There are also many highly reliable income stocks on the list. There’s WPP, which had paid a dividend every year since 1999. Then there’s Bunzl, which had increased its payout every year for over 20 years.

Overall, it’s a grim situation. And most analysts seem to agree the situation is likely to get worse in the weeks ahead.

Think long term

Long-term investors should not panic. Assuming the coronavirus crisis doesn’t send us into a long-lasting depression, many dividend payers are likely to resume their payouts in the not-too-distant future.

We may see some rebasing (payouts lowered), due to the fact some companies were paying out more than they could afford to. However, there’ll be companies that pick up where they left off when it comes to payouts.

I think the key is to not focus too much on 2020 payouts, given the extreme circumstances. Instead, look at future income potential. As analysts at UBS said recently in a note to clients: “It may be more useful to focus on the ability of companies to pay dividends going forward rather than simply how they act in 2020.”

A takeaway for all dividend investors

One key takeaway from this setback is that dividend investing isn’t as straightforward as it seems. I think it’s fair to say many investors, myself included, have become too complacent in relation to sources of yield in the recent bull market.

Cyclical stocks, such as the banks and housebuilders, make risky dividend plays due to the fact their earnings fluctuate.

Ultimately, the best companies to invest in for dependable dividends are those that are financially robust, can generate reliable earnings irrespective of economic conditions, and are growing at a healthy rate. Unilever is a good example. I’d be very surprised if it cuts its divi in the coronavirus crisis (although we can’t rule it out).

You may have to pay a higher valuation for a reliable dividend payer, like ULVR, and its yield is never going to be as high as other dividend stocks. However, what you get is reliability. At times like this, that’s priceless.

The post FTSE 100 dividend crisis: what should investors do now? appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Unilever, Lloyds Banking Group, ITV, and WPP. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Barclays, HSBC Holdings, ITV, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Investing for dividends, however, is not as easy as it sounds. When economic conditions deteriorate, companies sometimes cut their dividends, leaving their investors with no income stream. With that in mind, here’s a look at three FTSE companies that have been forced to cut their payouts recently.  

ITV

Only a few weeks ago, broadcaster ITV (LSE: ITV) said it would be paying a full-year dividend of 8p per share for 2019. And it was planning to pay another dividend of 8p per share for 2020.

Yesterday, however, the company said in order to conserve cash in the wake of the coronavirus disruption, it would no longer be paying its final 2019 dividend of 5.4p per share. And it withdrew its intention to pay that 8p full-year dividend for 2020. This dividend cut is disappointing for ITV shareholders, myself included, who held the stock for its big payout.

In hindsight though, there were a number of warning signs here. For starters, the company cut its dividend in the Financial Crisis. Secondly, dividend growth had dried up recently. No growth is often a precursor to a cut.

Overall, the main lesson here, in my view, is that cyclical shares aren’t ideal dividend stocks. Earnings fluctuations mean they can’t always afford to pay a dividend.

Marks & Spencer

Another FTSE company that has announced a dividend cut in the last week is Marks & Spencer (LSE: MKS). On Friday, it warned that it would be “severely impacted” by the coronavirus and that in the current circumstances, the board did not anticipate making a final dividend payment for this financial year. Analysts had been expecting a final dividend of 6.9p per share.

This is not the first time MKS has cut its dividend recently. In May, the group cut its final 2019 payout by 40%. And then in November, it cut its interim dividend by 40% too. These cuts came after the group held its dividend flat for two years.

A key takeaway here is that it pays to be careful with companies that have recently cut their dividends. If a company has cut the payout once, it may have no hesitation in doing so again.

InterContinental Hotels

Finally, InterContinental Hotels (LSE: IHG) has also been forced to cut its dividend. It said on Friday that, in an effort to protect the long-term health of the business, it was withdrawing the recommendation of a final dividend of 85.9¢ per share announced in mid-February. And it will defer consideration of further dividends until visibility has improved. Management added that the group is “conservatively leveraged”. But it said the dividend cut was necessary to ensure that it comes out of the coronavirus crisis as strong as it possibly can.

Of the three companies I’ve mentioned, this cut was the least predictable. Yes, the hotel industry is cyclical. But IHG has an asset-light business model (meaning more flexibility) and a strong balance sheet. It also has an excellent dividend growth track record and has had a high level of dividend coverage in recent years.

Ultimately, this cut really is due to the ‘black swan’ nature of the coronavirus. The lesson for dividend investors? Portfolio diversification is always crucial.

The post Dividend cuts: these 3 FTSE companies just cancelled their payouts appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in ITV. The Motley Fool UK has recommended InterContinental Hotels Group and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Unfortunately, ‘value investing’ — or buying stocks for lower than their intrinsic value and waiting until their stock prices correct — is harder than Mr Buffett made it look with many ‘bargain’ stocks turning out to be absolute dogs for their holders. Here are just a few ways of spotting and avoiding them.  

1. Sky-high dividends

Chunky dividends attract investors like moths to a flame. However, as holders of stocks like Centrica and Royal Mail will know, a big yield is often a sign that the market has lost confidence in a company, earnings are floundering and a cut is just around the corner.

How high is too high? It’s subjective but I’d say anything yielding above 5% requires extra scrutiny. It’s particularly important to check the extent to which dividends are covered by profits (found by dividing earnings per share by payout per share). Anything less than 1.0 should usually be avoided. Dividend cover of 2.0 or more is ideal. 

2. Susceptible to disruption

A company that struggles to compete with newer, nimbler rivals could continue falling in value regardless of how cheap its shares already are. 

A recent example of this would be Thomas Cook. The one-time FTSE 100 member didn’t adapt quickly enough to the fact that only a minority of people physically enter a travel agent to book a break these days. 

If you can’t identify a reason as to why a company will be able to stay relevant and grow profits over the years, then steer clear.

3. Too much debt

Even if a company can still hold its own, too much debt on its balance sheet — perhaps as a result of acquisitions in an effort to boost earnings — can be enough to kill it. This clearly becomes even more likely in the event of a sustained economic downturn.

Before buying into any stock, check its balance sheet and ask yourself whether you’d feel comfortable owning the shares during a recession. Anecdotally, the vast majority of stocks in my own portfolio have net cash positions, which should help them negotiate tough times without issue. 

4. A favourite with shorters

Generally speaking, it’s best to disregard stocks attracting the attention of short-sellers. Based on their usually-very-intensive research, these people are betting big money that the share prices of particular companies will continue falling, at least over the short term. 

There have been many examples this year in which the shorters have got things right: battered challenger Metro Bank, services provider Kier Group and the aforementioned Thomas Cook. All of these were ‘cheap’, based on conventional metrics.

Checking shorting activity isn’t difficult. Simply go to shorttracker.co.uk and enter the relevant ticker.

Price isn’t the most important thing

On their own, each of these indicators might not be sufficient to identify a value trap. Collectively, however, the chances of big trouble rise significantly.

That’s why I’m a big fan of star fund manager Terry Smith’s approach. While not dismissing the importance of buying at a good price, Smith feels identifying great companies is more important. With his Fundsmith Equity Fund having achieved an annualised return of 18.8% since inception, it’s hard to disagree.

The post Absolute bargain or cheap for a reason? How to spot a value trap appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Based on the market’s rather lacklustre response to today’s short company update (released to coincide with its AGM), I can’t see this situation changing anytime soon. 

According to management, Royal Mail’s performance in the first quarter of its financial year had been as expected. The outlook for 2019/20 was reiterated and all targets left unchanged. Considering the ongoing decline in letter volumes and the recent fall in advertising revenues as a result of GDPR, I suppose that’s the best existing holders could have hoped for. 

Today, Royal Mail’s shares can be picked up for just 9 times forecast earnings. That’s certainly cheap relative to the market as a whole, but I’m not inclined to think it represents a ‘bargain’ for prospective investors. 

Aside from ongoing problems in the business and the threat of a Jeremy Corbyn-led government seeking to renationalise it, I don’t think the chances of a further cut to the dividend can be easily dismissed either.

Royal Mail has said it will pay 15p per share to holders in the new financial year. This gives a forecast yield of 6.9% — still rather high for a company going through such a sticky patch.

Moreover, the extent to which this payout will be covered by profits is already looking rather low. A slight deterioration in trading will be all that’s needed to put the payout at risk of being cut further. And as things stand, there’s nothing to reassure me that this won’t happen. Put simply, I suspect there are far better opportunities for generating income elsewhere.

Coincidentally, one such company also reported to the market today.

Rising dividends

It may not have the lure of some stocks, but I continue to believe kettle safety control supplier Strix (LSE: KETL) is a great option for dividend hunters. Today’s trading update for the six months to the end of June showcased the kind of stability Royal Mail can only dream of.

Strix’s management is confident the company has traded in line with market expectations for the full year, despite ongoing political and economic uncertainty.

In addition to saying it had maintained its global share of the kettle control market, the firm also remarked it hadn’t suffered “any material impact” from US/China trade tariffs, thanks to the flow of goods being maintained between the Isle of Man and China.

Perhaps most importantly for holders, the £300m-cap disclosed that recent performance and strong cash generation would allow it to pay a total dividend of 7.7p per share for the financial year just gone (a 10% increase on FY2018). Based on today’s share price of a little under 160p, that gives a trailing yield of 4.8%. 

Yes, the shares might be slightly dearer than those of Royal Mail, but a forecast price-to-earnings (P/E) ratio of just 10 looks great value to me, considering the healthy dividend increase and the prospect of new appliance launches later in the year further supporting earnings growth. 

The post Here’s why I’m avoiding the Royal Mail share price and buying this dividend stock instead appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Strix. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

At the close of play yesterday, the shares were priced at just over 211p a pop — almost 62% lower than where they were exactly one year ago.

Today, however, they’re recovering strongly as investors react to the company’s proposed new strategy and its results for the full year.

Profits plummet

Revenue rose 2% to a little under £10.6bn in the 53 weeks to the end of March. Broken down, the company’s UK business reported parcel revenue growth of 7%, allowing it to offset a (now predictable) decline in total letter revenue of 6%. 

Revenue growth at General Logistics Systems (GLS), its parcel delivery network in Europe, came in at 8% with volumes up by 5%. 

In spite of this, adjusted pre-tax profit fell 30% from £565m to £398mn, even though transformation costs of £133m were less than expected. Understandably, however, the market was focused on what happens next.

New strategy

Unveiling a new strategy, CEO Rico Back stated that the company intended to “build a parcels-led, more balanced and more diversified international business”.

This, it is hoped, will allow Royal Mail to report operating profit margin of more than 4% in 2021/22 and then over 5% two years after that.  

A lot of this will depend on the success of its new ‘turnaround and grow’ plan for its UK business, which includes the introduction of 1,400 parcel postboxes following a trial in 2018.

GLS will also be scaled up with the intention of it making “a major contribution” to the company’s geographical and product diversification.

Of course, all this needs to be paid for, which will put a strain on cash flow. 

That’s why the biggest announcement of the day for investors surely relates to the rebasing of Royal Mail’s dividend.

A final payout of 17p will be paid this year, giving a total cash return of 25p per share — up 4% on the previous year. This gives a monster trailing yield of 11.3%.

The payout will then be reduced to 15p per share from 2019/20 “which may be supplemented by additional payouts” if cash flow allows.

I wouldn’t hold my breath on the latter. 

Worth buying?

Royal Mail’s shares rallied in early trading. While that may seem strange considering a whopping 40% cut to the dividend, yesterday’s 9% fall suggests that a lot of investors saw this coming.  

Personally, I’m all in favour of a struggling company reducing its dividend, albeit belatedly. Based on the share price at the time of writing, the new payout will see the shares yielding a tempting 6.8%. 

Nevertheless, I’m still wary. In 2019/20, the company is predicting a 5% to 7% fall in letter volume as a result of “continuing business uncertainty” (read Brexit) and “the ongoing impact of GDPR“.  

While growing parcel volumes might take some of the strain, Royal Mail still faces severe competition from the likes of Amazon. The latter’s share of the UK delivery market grew from 3% in 2013 to 7% in 2018.

And as the government continues to tear itself apart over the manner of our EU departure (and alienate previously loyal voters in the process), there’s also the possibility of Jeremy Corbyn becoming PM and eventually renationalising the business.

With so many better opportunities elsewhere in the market, Royal Mail just isn’t worth the risk in my opinion. 

The post Royal Mail slashes its dividend by 40% and shares jump. Time to pile in? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Last week, this came to pass with new-ish CEO Nick Read announcing that the £33bn cap and income favourite would be slashing its payout to a total of 9 euro cents per share (7.9p) from the 15.07 euro cents (13p) paid last year.  

You can read more about Vodafone’s results for the year to the end of March in my Foolish colleague Harvey Jones’s piece from the day. So, will I now be piling in? Not yet.

Part of my reasoning behind this is simply because the stock hasn’t bounced as I thought it might.

Indeed, it would appear that many investors are continuing to dump the shares, perhaps more concerned by the fact that management believed only a few months ago that the dividend wouldn’t need to be cut, rather than by the eventual cut itself.

Certainly, this big U-turn doesn’t exactly inspire confidence and, in my opinion, devalues talk of adopting a progressive dividend policy from now on. Quite why Read — Vodafone’s former finance director — didn’t bite the bullet and elect to rebase it earlier this year still perplexes me. 

What’s more, I’m not over-the-moon regarding the extent to which the company’s new dividend will be covered by profits.

Cover of roughly 1.3 times earnings is clearly a huge improvement on where it used to be, but I can’t help thinking the 6.4% yield might still not be completely safe if market conditions worsen. 

News of a dividend cut may help in making Vodafone a slightly less risky buy but, with so much investment needed, so much debt on its books and such a competitive landscape (particularly in Spain and Italy), the share price needs to come down even further to really get me interested. 

A tastier alternative

An example of a dividend and growth stock I’m far more positive on would be FTSE 250 drinks giant Britvic (LSE: BVIC).

On the income side of things, the company has a long history of raising its cash payouts, albeit modestly.

This year, analysts are predicting a 4.5% increase to 29.5p per share, leaving the stock yielding 3.2%.

That’s clearly a lot less than Vodafone but, on the flip side, it is likely to be covered twice by profits. Moreover, dividend hikes are far more preferable to a supersized-but-stagnant yield, in my opinion. The former smacks of a company in rude health. The latter suggests an inevitable cut when the business cycle turns. 

Britvic also trades on a little under 16 times earnings, despite having already performed very well indeed over the last year or so.

A dip in profit growth is expected this year, but things are expected to rebound in 2020, helping to bring an already-reasonable valuation even lower, to a P/E of 15. 

That might not be as cheap as some other companies offering far higher yields, but its defensive qualities, strong brands (such as Robinsons, J2O and R Whites), consistently solid returns on capital employed and manageable debt levels make me far more likely to buy its shares. 

Britvic releases half-year figures to the market next Wednesday. I’d be surprised if there were anything for investors to worry about.

The post This FTSE 250 dividend and growth play looks a better buy than Vodafone to me appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Are the company’s plans to finally enter the home delivery market and “transform online grocery shopping for UK consumers” sufficiently robust for new investors to get involved? Or could there further share price falls to come? Let’s start by looking at today’s deal in more detail. 

Done deal

Under the terms of the agreement, M&S has agreed to pay £750m to acquire a 50% share in the Ocado’s UK retail business. Eighty percent of this will come from selling new shares to investors. 

The rationale behind the deal is that it will allow Marks to benefit from Ocado’s technology and deliver some much-needed growth. The latter will get access to the former’s products, brand and information on its 12m food shoppers from September 2020 “at the latest,” once its current deal with Waitrose expires. The joint venture will trade as Ocado.com.

In addition to generating cost savings of at least £70m per annum by the third year of the deal, M&S CEO Steve Rowe claimed that those currently shopping with Waitrose through Ocado would benefit from his firm’s lower prices. Quite whether consumers will want to make the switch remains to be seen, of course. 

Show me the money!

Transformative or not, all this needs to be paid for. Clearly, news that the company has taken a knife to its dividend is bound to leave some investors smarting. Personally, I wouldn’t feel that aggrieved just yet. 

Following today’s cut, the company intends to pay a final dividend of 7.1p per share. Since M&S has hinted that this marks the beginning of a “resetting” of the dividend, it’s worth applying the same cut to next year’s interim dividend. A 40% reduction from the 6.8p paid in January and added to 7.1p would leave M&S yielding 4.1% in 2019/20. That’s hardly awful.

More questionable is whether M&S is paying too high a price to acquire a 50% stake in a company that only made £80m in profit last year. Rowe doesn’t think so, having stated that the deal allows the retailer to move its food offering online “in an immediately profitable, scalable and sustainable way.” Time is money, and M&S’s leader is clearly in a hurry. 

Not that Ocado’s owner will care. Its shares are up almost 5% today, giving some indication of who the market believes is benefitting the most from the deal. 

How patient are you?

Clearly, M&S had to do something to revive its fortunes following years of falling sales. If market participants wanted decisive action, they’ve got little to complain about now.

But should those following an income and/or value-focused strategy be tempted to catch this falling knife? Only if they already hold a diversified portfolio of stocks, in my opinion.

At 12 times predicted earnings before markets opened this morning, the shares were already fairly reasonably priced but — with so much still to be confirmed —  I wouldn’t expect a sustained recovery to the price anytime soon.

Short-term pain for long-term gain? Whatever happens, today’s deal marked a new, potentially fascinating chapter in the Marks & Spencer story.

The post Is the Marks and Spencer share price a FTSE 100 falling knife worth catching after today’s news? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

 A 6.8% drop in Q3 revenues to just under €11bn highlighted just how tricky it will be to turn the company’s fortunes around, despite a reduction in mobile contract churn and signs of stability in Italy, Spain, Germany and emerging markets. 

Vodafone’s stock was priced at 137p as markets closed last Friday. That’s almost 40% cheaper than one year ago and almost 65% below where  the shares were valued at the height of the dotcom bubble.  

You’d think that such a drop in price would mean that the shares were now in firmly in ‘bargain bin’ territory, but I still don’t think this is the case.

A price-to-earnings (P/E) ratio of 17 for this financial year feels too rich for a company that, despite attempts to streamline operations, could still struggle to grow earnings as fast as hoped if securing new licences proves more expensive than anticipated and the firm struggles to offload some of its infrastructure.

There will clearly come a time when Vodafone is worth piling into. Personally, I think this will only come after a cut to the payout is announced. The expected return of €0.15 per share (or 13p) gives a yield of 9.5%, which looks far too high when addressing the €30bn of net debt on its balance sheet should be a priority. 

Given the choice, I’d still prefer to back FTSE 100 peer and EE owner BT (LSE: BT-A).

Not perfect but…

With a similarly large amount of debt on its books and a big pension deficit, the £23bn cap isn’t devoid of problems. The difference, however, is that it’s already taken action on its dividends. 

BT reduced the interim payout by 5% from 4.85p to 4.62p last November. While any kind of cut is unlikely to please investors, I was actually encouraged by this move compared to the perpetual will they/won’t they? state-of-play at Vodafone.

Will the final dividend also be lowered? We might get a better idea on that when the company updates the market on Q3 trading this Thursday. 

For now, however, it’s predicted that BT will return 15.2p per share in the current financial year, equating to a still-really-rather-good yield of 6.4%.

Importantly, this payout is likely to be covered 1.5 times by profits. While cover of two times profits is desirable, this is still far more secure than the cash return over at Vodafone.  

Even if new CEO Philip Jansen, due to take up the post in February, does decide to cut the dividend further in order to tackle the aforementioned issues, I continue to think that this is reflected in the price of BT’s stock.

Based on it generating a predicted 25.6p earnings per share in 2018/19, the stock currently trades on 9 times earnings. While not as cheap as it once was, this still represents good value in my view, especially as returns on capital employed and operating margins are higher than at Vodafone. I also think concerns over the company losing contracts in the EU following Brexit could be overdone as the possibility of a hard departure lessens.

BT isn’t perfect but it remains a better buy for patient investors, in my opinion. 

The post Forget the Vodafone share price. I still think FTSE 100 peer BT looks a better buy appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

“Weak” second half

Having released a shock profit warning last November, today’s numbers were never expected to be impressive. That said, the scale and speed of Centrica’s decline are concerning.

As a result of significantly reduced profit in its Business energy supply units, adjusted operating profits fell 17% (from £1.5bn in 2016) to £1.25bn in 2017. Earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 9% with adjusted operating cash flow tanking 23% as a result.

Reflecting on today’s figures, CEO Iain Conn stated that Centrica’s financial performance in the second half of the financial year had been “weak“. He went on to remark that political uncertainty, the likelihood of increased regulation in the UK, the departure of customers to competitors and poor performance in North America had “created material uncertainty” around the company leading to “a very poor shareholder experience“. It’s hard to disagree with that.

Looking ahead, Centrica now plans to increase its cost saving targets to £1.25bn per annum (from the original £500m) by 2020. And 4000 more jobs will go, mostly from its UK energy supply business. Perhaps understandably, the company has also reassured investors that it does not intend to make any major acquisitions.

The biggest question on many shareholders’ lips, however, is surely what will happen to the company’s payouts if poor performance continues?

Ready for the chop?

Today’s full-year dividend of 12p per share leaves the company offering a worryingly high yield of 8.9%.

While some may take heart from Centrica’s desire to maintain the dividend at this level, it’s worth pointing out that this is dependent on the Windsor-based business meeting its cash flow and debt targets. According to today’s statement, these are between £2.1bn and £2.3bn for the former and within a range of £2.25bn to £3.25bn for the latter. Capital expenditure also needs to remain below £1.2bn. 

Given the very real possibility of the proposed cap on standard energy tariffs coming into force, it’s likely that these numbers will need to be revised at some point in 2018. If a dividend cut does come, expect the share price to react accordingly. 

Buyer beware

Centrica’s woes are yet another reminder of the need to check whether a company’s dividend policy is realistic. Aside from avoiding sky-high yields and looking at the extent to which payouts are covered by profits, it’s also important to scrutinise by how much dividends have grown over the last few years (if at all). The fact that Centrica’s dividend hasn’t budged since 2015 says a lot. Regular hikes to the dividend imply a company in rude health. A stagnant dividend suggests the opposite.

Holding a diversified portfolio, regardless of your investing strategy, can also be a wealth-saver. With the exception of a complete meltdown in the markets, you can be assured that your other holdings will help mitigate any losses from one or two nightmare holdings.  As things stand, Centrica’s is surely an example of the latter.

The post Should investors in Footsie income stalwart Centrica prepare for a dividend cut? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.