25 Jan Could these risky dividend stocks make you a fortune?
The pub operator continues to defy the increasing pressure on drinkers’ spending power and today declared that it “traded well over the Christmas period,” with like-for-like sales growing 1.6% during the two weeks spanning Christmas and New Year’s Eve.
It said that, had it not been for snowy weather conditions, like-for-like sales would have risen an impressive 3.4% during the fortnight.
But Greene King has a hell of a lot of work ahead to keep customers coming through its doors as economic conditions toughen. However, I’m confident the company’s footprint — spanning the more-affluent regions of London and the South-East — should stop earnings from slumping, while cost-cutting measures will provide profits with an extra level of protection.
The business is expected to endure an 11%% earnings decline in the year to April 2018, having said that. Dividend hunters, however, will be cheering news that the 33p per share reward currently forecast by City brokers — which yields an impressive 6.2% — is covered 1.9 times by predicted earnings.
And with earnings expected to rise 1% in fiscal 2019, the dividend is predicted to rise to 33.3p, meaning that the yield increases to 6.3%. Dividend coverage remains a whisker off the widely-regarded safety watermark of 2 times, too.
SSE (LSE: SSE) is another share offering up monster yields but, given the poor outlook for its retail operations, I wouldn’t encourage investors to splash the cash here.
The FTSE 100 business, like Centrica, continues to be hammered by the impact of cheaper, independent energy suppliers in Britain. And there remains plenty of custom for the likes of SSE to lose, having already seen its UK and Ireland customer base fall by 410,000 year-on-year, to stand at 7.72m in September.
News of SSE’s latest customer drop was reported back in November, and investors should be braced for another hefty decline when third-quarter trading details are released on Wednesday, January 31.
SSE is taking steps to address this problem by spinning out and merging its retail business with that of npower. But increasing calls for the deal to be investigated on competition grounds means the tie-up is by no means a foregone conclusion.
Big dividends looking fragile
At present, City analysts are expecting earnings at SSE to tip 8% lower in the year to March 2018. A 7% rebound is predicted for fiscal 2019, but with the energy giant fighting against colossal costs across the business and question marks lingering over the future of its retail operations, I see significant danger in this projection falling short of expectations.
On the plus side, the Footsie share is expected to keep its progressive dividend policy rolling, with payments of 94.5p and 97.4p per share being anticipated for fiscal years 2018 and 2019, correspondingly. These projections yield a mammoth 7.4% and 7.6%.
But with dividend coverage ranging at a meagre 1.2-1.3 times through to the end of next year, and net debt steadily growing, investors should treat these jumbo projections with extreme caution, in my opinion.
While SSE boasts a low forward P/E ratio of 11.1 times, I would much rather plough my hard-earned cash into Greene King today which also boasts a low earnings multiple of 8.3 times.
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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.