Dividends have been below loads of stress this yr. The COVID-19 outbreak has had a major impression on the worldwide economic system and the flexibility of many corporations to keep up their shareholder payouts. One of many hardest-hit sectors has been power due to the appreciable decline in oil demand and the related plunge in pricing. These elements compelled dozens of power stocks to slash or droop their dividend funds this yr.
Extra payout reductions may very well be within the playing cards given the persistent weak point throughout that sector. Two big-time dividends that could be the subsequent ones on the chopping block are these from oil large ExxonMobil (NYSE: XOM) and pipeline operator ONEOK (NYSE: OKE).
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Nearing the top of an period
ExxonMobil’s dividend appears to be hanging by a thread. The oil large had elevated its payout in every of the final 37 years. Nevertheless, it failed to present its traders a increase this yr. Whereas the corporate might technically hold its streak alive with one other increase early subsequent yr, its payout, — which presently yields 8.5% — appears extra more likely to go down than up.
Fueling that dour view is the projected hole between its anticipated cash circulation and its capital necessities. In keeping with one analyst, the corporate faces an $Eight billion shortfall between its projected cash circulation at $47 oil and its anticipated outlays for the dividend and capital bills. That may pile on extra debt, which has already risen from $47.1 billion to $68.Eight billion as a result of it considerably outspent cash circulation this yr because of decrease oil costs.
The corporate cannot proceed piling on extra debt with out placing stress on its stability sheet. Exxon in all probability wants oil within the mid-$50s to keep up its present payout and anticipated capital spending charge. Which means the dividend is in danger for a discount if oil costs do not enhance.
One of the best-laid plans additionally go awry
ONEOK initially anticipated 2020 to be a giant yr. The pipeline firm was placing the ending touches on a number of enlargement initiatives, which ought to have fueled vital quantity and cash circulation development. This earnings development would have enabled the corporate to steadily pay down the debt used to fund its enlargement program. That may have put its dividend on a extra sustainable basis.
Sadly, the COVID-19 outbreak upended its grand enlargement plans. Because of this, cash circulation will develop at a way more average tempo this yr. That compelled the corporate to promote stock and challenge higher-cost debt to shore up its monetary profile. Even with these strikes, leverage stood at an elevated 4.6 occasions debt-to-EBITDA on the finish of the third quarter. That is properly under its 4.zero occasions goal and additional away from its aspirational aim of three.5 occasions.
On the one hand, ONEOK’s expansion-related spending is on monitor to say no to round $300 million to $400 million per yr. That may allow the corporate to finance capital initiatives with extra cash circulation after paying its roughly 10%-yielding dividend. Nevertheless, it would not go away a lot extra for debt discount. Thus, the corporate would possibly observe a lot of its fellow pipeline friends and cut back its dividend to speed up its debt discount efforts.
Excessive-risk high-yield power stocks
ExxonMobil and ONEOK are attempting to keep up their payouts regardless of all of the challenges going through the power sector. Whereas their dividends may survive this yr’s market downturn, there’s a excessive threat that each would possibly find yourself lowering them to assist pay down debt. They don’t seem to be the very best choices for traders who depend on dividends to satisfy their monetary wants.
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Matthew DiLallo has no place in any of the stocks talked about. The Fintech Zoom recommends ONEOK. The Fintech Zoom has a disclosure coverage.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.
