Talking about this weeks likely dividend cut.

After last weeks shock announcement of a 50% cut in AMEC's dividend on the back of the downturn in oil services. I thought today I would talk about a likely dividend cut which may well be delivered this week. The stock concerned is TalkTalk (TALK) who are due to report an update on Wednesday and who have been in the news for all the wrong reasons given their data breach recently, although this was not the first time this has happened to them.

When I last wrote on this one back in July this year I finished up by saying "...they have continued increasing the dividend rapidly and the cover has therefore eroded to around 1x. Thus the strongly growing 4% yield seems attractive on the face of it, but it may be vulnerable to the forecast growth slowing or stopping if they don't end up delivering the growth in profits and cash flow that they are expecting. Otherwise the shares don't seem that attractive on other valuation metrics like the PE of 25x so a hold at best for yield I would say."

At the time they were suggesting the growth would be second half weighted and given the hack, the likely increased costs on the back of it and increased price competition I fear that the growth will not now be forthcoming and that dividend will now have to be cut given the debt and the limited cover. This is indicated by the score of 28 & 12 for financial security and cover on the Compound Income Scores (CIS). In addition they have already seen steady downgrades prior to this so the estimate revision score is also already very poor at just 8. Thus despite the decent yield and strong forecast growth the shares only Score 20 on the CIS overall (100 is best).

Even though the shares have already tanked on the back of the hack (see chart below) I think there could be further downside from here because profits estimates may be downgraded again and the dividend now likely to be cut or passed completely at the interim stage according to a Citigroup analyst when he said:

‘We think that TalkTalk were already slipping in customer numbers before their website was hacked. In their results next week we’re expecting TalkTalk to suspend its guidance, skip its interim dividend and provide an update on customer orders and cancellations in the wake of the security breach.’ (see this report at Thisismoney.co.uk for more details).

So it now looks like a sell to me, even down here, as a halving of the dividend to 6.9p and say a 4% yield again would suggest <180p. In terms of cash flow (for shareholders) I suppose it could be worse as if they do pass the interim and then say halve the final and following interim they'll only be looking at 4.6p or a 2% yield for this year based on Friday's price of 226p which reinforces the sell case for me, I note the shares are already off by 5% this morning in response to the press articles.

Of course I could be wrong, despite what the figures suggest and they may choose to tough it out and maintain the dividend, which would lead to a bounce and we'll only have to wait until Wednesday to find out.