I spotted an interesting article over at Interactive Investor in recent days entitled “Top stock picks for 2018.”
Apparently global wealth manager UBS has released a list of top stocks for 2018 (don’t these normally come out in December?). UBS asked 17 analysts to come up with their best ideas across Europe for next year, and there were several key names from the FTSE 100 that made the list.
I haven’t yet seen the full list, but Interactive Investor advise that the following stocks were among UBS’s top stocks for 2018:
- Lloyds Banking Group
- J Sainsbury
- Royal Dutch Shell
That’s certainly an interesting list of names.
As a long-term dividend investor, I’m not so concerned about how a stock performs over a one-year period. I’m more interested in whether the company can provide me with a sustainable income stream over the long term. Do any of those names have potential from a dividend investing perspective? I believe some do.
Starting with Lloyds (LON: LLOY) (LLOY.L), analysts expect some pretty hefty dividend payouts here over the coming years. I covered Lloyds’ forecast dividend payout here recently. If analysts are right, Lloyds could potentially yield almost 7% by FY2018. Much of this will depend on whether the UK economy remains in healthy shape, and whether the conduct charges Lloyds has had to pay in recent years (a huge sum) dry up. I’m cautiously optimistic here, although not yet a shareholder.
WPP (LON: WPP) (WPP.L) has seen its share price hit in recent months, falling from around 1,900p to 1,400p. Sentiment towards the advertising market is very low right now. However, WPP has an excellent dividend growth track record, and recently increased its interim dividend by 16%. With the company forecast to pay 61.9p in dividends this year, the prospective yield of 4.4% looks to be an opportunity in my view. Dividend coverage should be around 2.0 times. UBS view the stock as “oversold”and have a 1,900p price target. I bought some WPP stock recently.
It’s no secret that Royal Dutch Shell (LON: RDSB) (RDBS.L) pays a high dividend. Indeed, last year’s payout of $1.88 equates to a yield of 6.2% at the current share price and exchange rate. However, is the dividend sustainable with oil prices around the $50 mark? Dividend coverage in the last two years has been extremely thin. Yet looking at the Q1 and Q2 results, Shell’s cash flow does seem to be reasonable. In Q1, Shell generated operating cash flow of $9.5bn and free cash flow of $5.2bn. This was enough to cover the dividend payments of $3.9bn and reduce debt. In Q2, operating cash flow was $11.3bn and free cash flow was $12.2bn, enough to cover the $3.9bn dividend payment again. Keeping in mind that Shell hasn’t cut its dividend since WW2, it looks to me that Shell’s dividend should be safe for now, assuming oil prices don’t plummet again.
Prudential (LON: PRU) (PRU.L) is a stock on my watch list. I really like the story here, with the significant exposure to Asia. The insurer is expected to pay 47.2p in dividends this year, which is a yield of just 2.7% right now. That’s a little too low for me, so I’m going to wait patiently here, in the hope of picking up the stock with a higher yield at some stage.
J Sainsbury’s (LON: SBRY) (SBRY.L) dividend prospects don’t look appealing to me. The supermarket has cut its dividend for the last three years and a further cut is expected this year. Competition in this sector is likely to remain extremely competitive in coming years, with Aldi and Lidl aggressively targeting market share, so I’m happy to pass here.
Similarly, easyJet (LON: EZY) (EZY.L) is forecast to slash its dividend by 25% this year. I wrote an article about easyJet’s dividend policy here. So that’s another no for me.
Next (LON: NXT) (NXT.L) is an interesting one. The retailer is paying out four 45p special dividends this year, so all up, shareholders can expect a dividend yield of around 6.5% this year. A decline in the share price from around 8,000p in late 2015 to 5,175p has also left the stock trading on a forward looking P/E of 12.8. However, I’m just not sold on the long-term story here. In my view, the shift to online retailing is going to make this sector very competitive. While the company said recently that its prospects going forward “appear somewhat less challenging than they did six months ago,” it commented that “the retail environment remains tough.” With that in mind, this is another stock I’ll be giving a miss.
Lastly, Vodafone (LON: VOD) (VOD.L) is another dividend stock I’ll be passing on. Dividend coverage has been low here for several years now, and with the stock currently trading on a forward looking P/E ratio of 27.5, I’m not seeing much appeal at present.
Disclosure: Edward Sheldon, CFA owns shares in Royal Dutch Shell and WPP.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.