Though bond yields didn’t jump as much last month as they did in June, interest rates are still on the rise.
The yield on ten-year treasuries was cranked up from 2.5% at the end of June to 2.6% at the end of July. It’s a small move in terms of basis points, but that small move still trumped another batch of dividend paying stock that had been yielding somewhere between those two rates.
Here are the five stocks investors need to be most worried about now that interest rates are a tad higher. Note that each has problems above and beyond unimpressive yields — the rise in bond yields is just the proverbial last straw.
Once deemed immune to even the worst of conceivable economic situations, high-end handbag maker Coach (COH) has finally started struggling. Last quarter, same-store sales declined by 1.7% — the second time in the past three quarters that sales fell.
You can blame Michael Kors (KORS) for that. While Coach was once the top-tier name in handbags, its designs are stuck in the 90’s, and their former target demographic has largely aged themselves out of the luxury purse market. It’s a problem that can be fixed, but not quickly. It will require new looks and rebranding, which could take years.
The current yield of 2.5% isn’t apt to crumble, but with margins already being crimped as the company heads into an overhaul (two executives are leaving next month), the yield isn’t strong enough to justify riding out the looming turbulence.
Deere & Company
While the global economy may be holding its own, it’s not red hot. Capital expenditure plans are being dialed back … particularly for heavy equipment, and particularly thanks to China’s slow-down. Caterpillar (CAT) reports that sales of construction equipment in China are only half as strong now as they were in 2011.
Fortunately Deere & Company (DE) isn’t heavily reliant on China, and leans more towards the farming machinery business than heavy construction. It’s not a completely clean break, though, and food-shortage mania isn’t getting much traction. That’s why William Blair saw fit to go ahead and downgrade DE all the way to an ‘underperform’ earlier in the week.
The current yield is 2.4%, but unlike Coach, with Deere’s net margins of only 8.5%, that payout isn’t exactly well-shielded.
Advertising and marketing agency Omnicom Group (OMC) currently yields 2.5%. Not bad. Better still, it has cranked up its quarterly payout from 15 cents per share in 2009 to a hefty 40 cents per quarter as of this year.
You’d think that the near-tripling of the dividend would mean earnings have also tripled during that time. But you’d be wrong. In 2009, the 60-cent dividends were 23% of the $2.53 per share earnings. In 2012, the annual dividend total reached $1.20 per share, or 33% the $3.61 earned. This year, the company’s on pace to pay out $1.60 per share – a whopping 41% of the projected profit of $3.88.
Bottom line? Shareholders have become accustomed to increases, but the dividend’s growth rate is getting to the point where it can’t continue to improve. That won’t go over very well.
Had it just been a one-time event, last quarter’s earnings miss for H&R Block (HRB) might have been dismissible. But it wasn’t.
The tax preparer/bank missed estimates in its two most recent quarters, and fell short in five of the past seven quarters. Now it’s selling its banking business, which is good news in terms of getting and staying focused, but could be a problem in terms of reliable revenue.
Throw in the continued taxpayer migration from tax filing companies like H&R Block to online-filing services, and even its core business is under attack. Already below risk-free rates, there’s no real clarity on how — or even if — the current 2.5% yield will survive.
Earlier in the year, when the government sequester was announced, many feared the worst for the economy. When the sun rose the next day and stores opened and people still went to work, though, fears of the sequester’s impact started to abate.
As it turns out, investors relaxed too soon. The military is finally starting to tighten the purse strings, and that’s making life really difficult for Northrop Grumman (NOC).
Just to be clear, Northrop Grumman is still winning new contracts. But it’s losing a lot of them, too … big ones, including a contract to maintain the Air Force’s ICBMs, which was a worth $6.5 billion. Now BAE Systems will be doing the work. The F-35 program is also reported to be on the chopping block, for which Northrop Grumman makes the communications and navigation systems.
Yep, life’s starting to get real tough for Northrop Grumman, and that 2.5% yield may not be growing much in the foreseeable future.
As of this writing, James Brumley does not have a position in any of the aforementioned securities.