With Vodafone (LON:VOD) confirming what many had long been suspecting by rebasing the dividend this week, attention has turned to some of the other big payers on the FTSE 100 who could be about to hack down shareholder rewards.
Centrica (LON:CNA) is one such share many, myself included, are tipping to keep reducing the dividend as debt rises and customer numbers dive. But there’s no shortage of Footsie stocks whose dividend dashboards are also flashing red. BHP Group, J Sainsbury (OTC:JSAIY) and Marks & Spencer are a handful which, for a variety of reasons, some brokers expect to reduce investor rewards over the next couple of years.
Investment costs to crush dividends? Arguably, though, Vodafone’s telecoms cousin BT Group (LON:BT) (LSE: BT-A) is the stock attracting the most bets as to who will be the next high-profile dividend slasher.
I believed the FTSE 100 firm would cut the dividend before Vodafone, and while the latter may have won this particular race, it’s only a matter of time until BT follows suit, certainly in this Fool’s opinion. And latest financials released in the past fortnight have exacerbated my already-sobre expectations.
In them, the business declared it expected revenues to fall a further 2% in the 12 months to March 2020, and for adjusted EBITDA to fall again to between £7.2bn and £7.3bn, down from £7.4bn in the year just passed. It also declared that normalised free cash flow would range £1.9bn and £2.1bn, slumping from the £2.4bn of last year.
Equally troubling for dividend investors was fresh news on BT’s investment programme. First it advised capital expenditure would register between £3.7bn-£3.9bn in fiscal 2020, and declared it was upgrading its targets for its fibre-laying programme too, news which has raised anxiety over the size of dividends beyond the near term.
The company now plans to have 4m premises wired up within two years, up from its previous goal of 3m, while it also supercharged its target for the mid-2020s to 15m premises, from 10m previously. Add in the costs of establishing a market-leading 5G mobile network across the UK, and BT could be accused of stretching itself too thin. Something surely has to give, right?
Expect a hefty payout cut BT kept the full-year dividend locked at 15.4p per share for fiscal 2019, and said it expects to shell out a similar reward in the current fiscal year. This isn’t what City analysts are predicting, however, with consensus suggestive of a 15.1p total reward.
Should you still be drawn in? After all, this projection still yields a giant 7.5%, smashing the FTSE 100 broader forward average of around 4.5%.
Absolutely not, I would say. I believe a bigger cut could be in the offing, given the combination of BT’s mediocre dividend coverage (of 1.7 times) and its battle-weary balance sheet. Investors should also be prepared for additional cuts further down the line as the business invests for growth and its sustained revenues slippage shows no signs of abating.
My advice? Look past BT and go hunting for income elsewhere. There’s no shortage of great dividend payers to pick up today, after all.
Royston Wild 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.
Motley Fool UK 2019