Plenty of large-cap shares offer attractive dividends today. But not all of these firms can support their shareholder payouts. Three FTSE 100 companies, in particular, could be forced to cut their dividends in 2020.
As such, it might be worth avoiding these stocks over the next 12 months.
St. James’s Place
St. James’s Place (LSE: STJ) has faced a considerable amount of criticism over the past 12 months regarding its wealth management fees. Several newspapers reprimanded the wealth manager last year for charging customers high management and exit fees, as well as planning lavish staff parties.
This wave of bad publicity could impact the firm’s ability to grow going forward, which could mean that management will have to rethink the company’s dividend policy. It currently supports a dividend yield of 4.2%, but the payout is not covered by earnings per share, implying the business is paying out more than it can afford.
Also, the wealth manager currently trades on a price-to-earnings (P/E) ratio of 33. This suggests that the stock could be overvalued at current levels. The rest of the sector is trading at an average P/E of 14.
As a result, it might be best to avoid ahead of possible further turbulence in 2020.
Another company that faced investor and customer criticism in 2019 was Tui (LSE: TUI).
The collapse of peer Thomas Cook should have been a boon for Tui, but other problems have continued to weigh on its bottom line. In March last year, management warned that the grounding of Boeing 737 Max aircraft could hit profits as it cut its full-year earnings forecast by more than a quarter.
The firm reiterated this forecast towards the end of 2019 and went on to add that “external challenges” would continue to hit earnings in 2020.
The stock currently supports a dividend yield of 4%, which looks attractive in the current interest rate environment. Still, considering the challenges facing Tui, it might be better to seek out income elsewhere.
Debt could also be a problem for the group. Borrowings stood at £1.1bn at the end of its last fiscal year, up from under £100m in the prior year.
These trends seem to suggest that Tui is in for a stormy 2020.
FTSE 100 utility groups like United Utilities (LSE: UU), are usually considered to be some of the market’s safest investments. However, the outlook for these businesses is changing.
The industry regulator Ofwat recently announced that it would be clamping down on water businesses’ spending plans. The regulator wants these companies to cut customer bills and spend more on maintenance, rather than returning cash to shareholders.
This new regime could be bad news and as such, now could be a good time for investors to exit the sector.
United currently supports a dividend yield of 4.3%, but the payout is only covered 1.3 times by earnings per share. It also trades on a relatively demanding P/E ratio of 16.7. Considering all of the risks facing the business, this valuation does not leave much room for error.
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Rupert Hargreaves owns no share 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 2020