In City speak the term ‘fallen angel’ is given to bonds that were once highly rated by investors and credit agencies but have since fallen on hard times. The name is usually given to those that were once rated ‘investment grade’ but have since been downgraded to ‘junk.’
The same terminology can be applied to fallen dividend angels — those companies once considered dividend champions but now unloved by income investors.
Out of favour
Talktalk Telecom (LSE: TALK) is one such fallen dividend angel. This time last year the company was considered a safe bet for income investors. Operating in the traditionally defensive market of telecoms, Talktalk paid out most of its income to investors via dividends and was highly praised by income investors. But storm clouds are gathering over the firm.
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Talktalk’s management is still committed to the company’s dividend payout. At the time of writing, the shares support a dividend yield of 8.6%, and management has stated the payout will be maintained at this year’s level during 2017.
However, Talktalk’s debt is rising, and City analysts are now openly calling for the company to cut its dividend and prioritise debt repayment as earnings fall. The company was recently forced to ask bankers for a £75m receivables purchase agreement to improve its financial position and almost all of the company’s debt now falls due within three years. Maybe it’s wise to avoid Talktalk for now despite its high-single-digit dividend yield.
Regulator clampdown
Shares in Plus500 (LSE: PLUS) plunged earlier this month after the FCA issued new rules on the promotion of CFDs to retail investors. These declines have left shares in the company supporting a highly attractive dividend yield of 11.7% but this yield might not be around for long.
According to Plus500’s management, the new FCA rules will have “a material operational and financial impact on the UK regulated subsidiary.” The company’s dividend payout is only covered one-and-a-half times by earnings per share, which doesn’t leave much room for flexibility, indicating to me that the payout could be cut next year as regulations come into force.
Shipping sector problems
Braemar Shipping Services (LSE: BMS) has been hit by the general downturn in the shipping industry this year. The company’s shares have lost a third of their value as management has warned on profits and City analysts have downgraded forecasts. For the year ending 28 February 2017 analysts are expecting earnings per share to decline 39% to 21p, which means that even after recent declines, shares in Braemar are trading at a forward P/E of 12.9. The company’s dividend will be held steady at 26p for this financial year.
Next year, Braemar’s financial position is expected to improve. City analysts have pencilled-in earnings per share of 27p for the year ending 28 February 2018, up 28% year-on-year. The payout is expected to be held at 26p. If Braemar’s earnings recover to this level, it’s likely the dividend will be maintained so the current 9.3% dividend yield could be here to stay.
