The London Stock Exchange is home to hundreds of dividend shares. And some of the most popular reside within the UK’s flagship index – the FTSE 100. But despite their popularity, not all of these businesses look like good investments in my eyes.
In fact, there are three in particular that continue to be favourites despite some alarming traits that could see dividends slashed in the future – two have already started cutting payouts.
Another turnaround attempt
Being a Vodafone (LSE:VOD) shareholder over the last six years hasn’t been easy. The telecommunications giant has struggled to hold onto market share while rising debts put pressure on its profit margins. Numerous attempts by management have been made to right the ship, but so far, none seem to have done the trick.
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The latest attempt to fix the problems comes from new CEO Margherita Della Valle. And to her credit, she has started restructuring operations into a more efficient machine.
Non-core assets in Spain and Italy have been sold off, and the proceeds have been allocated to deleveraging the balance sheet. Meanwhile, its digital payments solution in Africa continues to grow at an impressive rate, now contributing around a fifth of total revenue.
Unfortunately, Germany remains the group’s primary source of cash flow. And performance here continues to disappoint as customers turn to alternative providers. Consequently, the future of Vodafone’s dividend remains uncertain, especially since it’s recently been slashed in half.
Massive overhaul = massive problems?
Just like Vodafone, income investor favourite National Grid (LSE:NG.) has seen its dividend take a beating of late. The energy infrastructure provider is also trying to spark new growth, and is spending a whopping £60bn to try and do it!
The plan is to establish a new portfolio of renewable energy infrastructure assets to profit from the UK’s steady transition away from fossil fuels. And to be fair, this is an enormous market opportunity that even the government is backing. But to execute this radical overhaul, management is diluting shareholders, taking on even more debt, and sacrificing its status as a Dividend Aristocrat.
Historically, overhauls of this scale have almost always run into trouble along the way. If everything goes smoothly, then National Grid shares could prove to be a lucrative source of passive income in the long run. But that’s a big ‘if’. Unexpected delays, disruptions, or a simple underestimation of costs could put shareholder payouts in jeopardy. And that’s not something I’m keen to add to my portfolio.
A shifting regulatory landscape
As dividend stocks go, British American Tobacco (LSE:BATS) has defied expectations more than most. The increasingly strict regulations surrounding cigarettes have made it harder and harder for tobacco companies to thrive. Yet, this firm has continued to exercise its pricing power to expand cash flows, raise dividends, and maintain a staggeringly high yield.
While commendable, the long-term outlook for this industry remains riddled with uncertainty. The government has just recently announced it’s considering further restrictions on smoking in public outdoor areas in the latest strike against the industry.
Management is fully aware of the regulatory threat and has subsequently been pushing into alternative products like vaping devices and heated tobacco. However, with these products struggling to maintain growth versus fierce competition, the future of British American Tobacco’s dividend doesn’t look bright in my eyes.
