4 Dangerous Dividend Stocks to Avoid for Retirement

These names could be trouble -- there's better yield elsewhere

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4 Dangerous Dividend Stocks to Avoid for Retirement

Hang Up the Phone

oi185 4 Dangerous Dividend Stocks to Avoid for Retirement

It’s been a difficult year for Oi SA (OIBR), Brazil’s largest landline operator, whose stock is down 44% year-to-date through Oct. 29 — a 70-percentage-point swing from the S&P 500. Over the past five years it’s achieved an annualized total return of -11.2% compared to 12.8% for the iShares Latin America 40 ETF (ILF). Brazil’s pension funds can’t be too happy about this situation.

The company’s board had finally seen enough by late January, firing CEO Francisco Valim and replacing him in June with Portugal Telecom (PT) veteran Zeinal Bava. The CEO has implemented a new business strategy that includes cutting the dividend payout in 2013 by 75% to $228 million from the $913 million originally forecast. It will continue with this reduced amount through 2016.

Oi SA has $13.5 billion in net debt as of the second quarter, 26% higher than Q2 2012. Bava needs to seriously conserve cash. While Oi SA has cut the dividend as far as it can without sacrificing its corporate objectives, I have to think dropping it entirely will still be a consideration if it can’t improve free cash flow substantially over the next few quarters.

Yes, its yield of 22% ($228 million in dividends divided by 546 million ADS-equivalent shares equals 42 cents divided by share price of $1.87) is incredibly enticing. However, many analysts in Brazil are recommending clients avoid its stock until it does what it says it’s going to do. Analyst Andres Medina-Mora of Corporativo GBM SAB believes it will take years to unwind the problems at the telecom.

Don’t fall for the rhetoric or the double-digit yield. It’s not sustainable. Either Oi SA will fold like a cheap suit or your yield will drop down to industry norms. Either way, it’s an aberration — and it’s definitely one to avoid for retirement.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, http://investorplace.com/2013/10/4-dangerous-dividend-stocks-avoid-retirement/.

©2014 InvestorPlace Media, LLC

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