If the entire week of 2016 was a feeble one for stock markets, this second week is becoming into the worst. Spirited expectations of a primary bullish run, the FTSE 100 dropped by 329 points (5.3%) last week to 5,912,with another down by 13 points to 5,899.
It’s mostly the outcome from China as the world begins to realize just how much distress the country could be in. Monday saw Brent crude tumbling close to the 12-year low, at just $36.67, lasting the repeated slide that began at the turn of the year.
With a stock price of 1,376p, which has descended a monstrous 35% in the past 12 months, Royal Dutch Shell (LSE: RDSB) is ready for a dividend yield of 7.7% for the year that ended in December 2015, based on the existing expectations. This forecast to stay unchanged in 2016.
The City’s confidence is built on the company’s pledge to uphold its dividend at 188 cents per share, but will that promise really be served? Well, anticipated 2015 earnings wouldn’t shelter the dividend, and cover would hardly screech into positive territory as stated by the 2016 forecasts of an 8% recovery in EPS to around 128p. To fathom it, that forecast is old, and doesn’t include the recent slide of oil prices, and would necessitate an important increase in the price of a barrel to get close to being sustainable.
Meanwhile, BP (LSE: BP) doesn’t look much better as well, whose shares have recently dropped to a relatively modest 17% in a year to 333p. In a subsequent fall of 83% fall in EPS for 2014, there’s a 56% salvage on the cards for 2015 shadowed by another 6% for 2016. But then again, that clearly doesn’t cover the latest oil falls.
Existing signs suggest a dividend yield of 7.3% from BP for 2015, falling marginally to 7.2% in 2016. BP has made no exact dividend promise, but has made it clear that its policy is to preserve steady payments. And when the price began falling, CEO Bob Dudley uttered a primary opinion that the market could be in for low oil for two or three years, even though it was at a time of considerably higher prices than today.
BP’s dividend cover position is feebler than Shell’s, with earnings projected to meet fairly 85% of its 2015 payment, growing a little to 90% in 2016. On the other hand, it doesn’t consider the most recent falls, and the reality could well be tougher.
The key question for income investors is whether absorbing the plunge would offer an effective sustained annual income in excess of 7%, or whether it’s an alleged value trap, where a dividend cut is obliged on the two companies.
If the companies wish to tough it out, both could surely locate the means to keep up those annual payments for a few years yet. From that perspective, Shell appears to be in the right place now.
Steve Smith
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