Through the better part of May, when 10-year treasury bonds were yielding 1.9% (or less), even stocks with the most tepid of dividend yields were still more attractive than fixed-income investments. Now though — with 10-year notes paying out something closer to 2.6% — income-oriented investors are being forced to reconsider some of their lower-yield stocks.
Some of the companies now under a higher level of scrutiny will adjust by raising their dividends. For other stocks, the market will naturally crank up their payout by lowering the share price. For a handful of low-dividend equities, however, there’s just no getting around it — higher treasury yields are going to suppress any upside they may have had.
Here are the most vulnerable names in that bunch. Note that weak yields aren’t the only challenges these names are facing.
Genuine Parts Company
At a trailing P/E of 18.6 and a forward-looking P/E ratio of 15.7, Genuine Parts Company (GPC) was already pressing its luck with investors.
But, with the dividend yield of 2.8% now being within a few basis points of a completely risk-free return, the auto parts supplier has crossed a mental line in the sand.
The world’s biggest retailer has always likely been viewed as a dual trade. The dividend yield of 2.6% that Walmart (WMT) currently boasts satisfies value-oriented, income-seeking shareholders. Meanwhile, the fact that the company can simply trounce the competition wherever it sets up shop appeals to growth-oriented investors.
The problem is that Walmart’s huge size has finally caught up with it. Service stinks, the stores aren’t stocked well, and the growth rate lately has relied on heavy spending to enter overseas markets that are already starting to feel a little saturated.
That in itself doesn’t threaten the dividend, but those investors who owned WMT because it was a double-barreled cash cow may find that the cash udder is starting to get squeezed, leaving little room for the kind of growth (including dividend growth) it had enjoyed in the past.
The Chubb Corp.
Of all the names that were on the bubble in light of rising interest rates on treasuries, perhaps The Chubb Corp. (CB) had the least wiggle room of all. Aside from the fact that its dividend yield of 2.10% was just hurdled by intermediate-term bonds, the insurers top line has only grown and almost imperceptible 1.0% per year for the past couple of years.
Worse, income has actually deteriorated considerably during that time, from $6.76 per share in 2010 to last year’s $5.69. Chubb has opted to up its dividend payout during that span anyway, but something’s got to give sooner or later.
Throw in the fact that analysts see another modest dip in income in the cards for 2014, and there’s a lot for dividend-lovers to be worried about.
To give credit where it’s due, the Airgas (ARG) business model is probably among the best for investors who love dividends. The company generates lots of recurring revenue by refilling tanks for all sorts of medical and industrial uses. Airgas has also managed to crank up its dividend for several years on end, and will likely be able to keep doing so.
So what’s the downside? The current yield is a mere 2.0%, and the same business model that it so reliable also doesn’t produce a great deal of growth. Last year’s top line was only 4.4% better than 2011’s, and the bottom line was only 8% better (and that was with a ton of cost cuts). The dividend payout jumped from 31% of income to 37% of income during that time, however, which is approaching the point where there’s little cash left to give out without sacrificing growth.
Even modest improvement on a yield of 2.0% leaves the payout short of 10-year treasury bonds.
Like Chubb, the dividend yield of 2.1% that medical supply maker Becton Dickinson (BDX) presently offers just got hurdled by a risk-free payout. But at least Becton Dickinson has posted a couple of years’ worth of respectable sales growth.
Unfortunately, BDX is also like Chubb in the one place where it doesn’t want to be … the bottom line. Net income has fallen for two straight years despite the solid rises in the top line. It’s an alarming development for a company that has upped its dividend every year since 2003. But, with uncertainty stemming from Obamacare on the horizon, the first thing to suffer may well be the company’s now-comparably-weak payout.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.