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Could Shell cut its dividend for the first time since World War II?

Could the oil super major follow in Carillion’s footsteps and slash its dividend?
money on a graph
Harrington's law dictates that any yield over 7% hints at a dividend cut the next time around

A quick check on the Carillion PLC (LON:CLLN) dividend yield prior to this morning’s profit warning would have told you that the infrastructure contractor’s divi yield was above 8%.

That’s a pretty punchy number which hinted that, along with it being shorted up to the gills, a dividend cut or suspension was almost inevitable, according to Harrington’s law (named after Proactive’s very own John Harrington).

It works on the (almost) fail safe theory that anything above a 7% yield is a signal that a cut is expected, while anything above 8% is almost nailed on.

As sure as eggs is eggs, alongside Carillion’s warning that full-year revenues would be lower than expected, was another line which revealed that the 2017 dividend had indeed been suspended.

I did a quick screen of companies with a market cap of £110mln or higher as well as a dividend yield in excess of 7%.

I added four more columns to the screen: forecast yield (are brokers expecting a cut?); free cash flow dividend cover (are they generating enough cash to cover the divi?); dividend cover (earnings per share divided by dividend per share); and net debt to EBITDA (often used in banking covenants).

A dozen or so companies popped up, although a few in particular caught my eye.

Shell to cut divi for first time since 1930s?

Oil giant Royal Dutch Shell PLC (LON:RDSB) was the first to grab my attention because of its famous divi.

It hasn’t cut its dividend since at least the 1930 but low oil prices, and possibly expectations of a dividend cut, have weighed on the share price in recent months, and it currently has a yield of 7%.

That’s enough to (just) bring it into the bottom of the screen, which would suggest that a cut could be on the cards.

It’s a suggestion that has been mooted by analysts at Citigroup, who recently said that the whole oil industry is “surely going to have to address the high cost of dividends”, with BP PLC (LON:BP.) and Shell having “the biggest questions (to) answer”.

Given that Shell’s divi has survived oil crises and wars, the world would likely turn on its head if a cut ever did materialise, but keep an eye out on this one nonetheless.

Petrofac’s troubles could spark a trim

Troubled oil services group Petrofac PLC (LON:PFC) also made an appearance on the list with a whopping dividend yield of 10.1% meaning, according to our theory, that a dividend cut is almost a given.

It’s not as simple as that though. Petrofac has paid out 65.8 US cents for the past four years so it has some form for maintaining its payouts while it has also absorbed an ever-growing yield.

Can it handle another year of high dividend yields? Possibly. But it also needs to start saving up some cash ahead of what could be a sizeable fine from the Serious Fraud Office in relation to its part in the Unaoil corruption scandal.

Jefferies analyst Mark Wilson is also looking for Petrofac to scrap the dividend to help it pay off around US$1bn worth of debts and payments which are due between now and 2020.

He thinks suspending the divi would provide around US$665mln in cumulative free cash flow over the period.

Centamin also likely to cut its payout

Egyptian gold miner Centamin PLC (LON:CEY) is another that made it onto the blacklist.

Last year it paid out 15.5 US cents at a sizeable yield of 9.1% and, even with a bit of share price appreciation in 2017, it’s still on course to record a yield of 8.2%, assuming it pays out 15.5 cents again.

As the law dictates, that means it’s likely that there’ll be a reduced divi on offer this year and anlysts tend to agree with that view.

In fact, the consensus forecast (according to Factset) for the payout in 2017 is around 6.8 cents, which would equate to a yield of around 3.4%.

As with any theory, it’s not hard and fast and there will always be one or two which fall through the net.

That said, it is an indication of what the market is thinking right now and, although it can be wrong, that’s rarely the case.

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