by Lawrence Meyers | February 14, 2014 8:52 am
Bond yields have been under pressure for quite some time, which has put pressure on the many investors who rely on that regular fixed income to keep them afloat.
These investors had relied for a long time on the safety of bonds — little price volatility, the ability to choose from all types of bond investments according to one’s risk tolerance within a universe of low-risk choices, and regular interest payments. Being pushed out onto the risk curve means these investors have moved into dividends stocks.
That’s just fine, presuming the dividend stocks pay out reliably. However, even the most reliable dividend stocks still expose that investor to capital gain risk, something income investors usually didn’t fret much about. Here are three dividend stocks who I believe are at serious risk, which would vastly offset any kind of benefit from their dividends.
Walgreen Co. (WAG) is not in danger of going bankrupt. WAG stock has plenty of cash, it turns a sizable profit, and it generates plenty of free cash flow. So what’s the big deal? Why am I suggesting you sell this stalwart among dividend stocks? Because drugstores like WAG stock are what I call a “sunset industry”.
This isn’t some growing new industry set to take the world further into the 21st century. It’s an old concept that hasn’t innovated, won’t innovate, and will slowly but surely die out over this century. When I walk into a Walgreens, I see a miniature Target (TGT), a more expensive Dollar Tree (DLTR), and a provider of prescriptions in a world where everything is becoming mail order.
Even if you say I’m crazy and that people will always use drug stores, I’ll say you are crazy for paying 18.5 times estimates on a company growing FY14 EPS by only 11%. If you need a 2.1% yield that badly, I refer you to AT&T (T), where you can buy an overvalued stock with better FCF and a dividend with a much higher 5.7% yield.
Procter & Gamble (PG) is perhaps the king of defensive stocks. But if that’s what you consider “defensive,” I’d like to gift you this hand-grenade with its missing pin. P&G stock is old news. It is as stagnant a company as you are likely to find in the large-cap arena.
Things are so bad that P&G stock has introduced a lower-end version of Tide detergent. How can you provide a lower end version of laundry detergent? Tide sales fell 9% last year, and yet how can P&G expect that customers won’t trade down to whatever this low-rent version is, and cut revenue even more?
Moreover, the company is exposed to currency problems beyond its stagnating core business, and it just cut earnings guidance from a 5-7% EPS gain to 3-5%. P&G is a company in paralysis. Once again, we have P&G stock selling for 18.5 times estimates, but this is on only 5% growth. You can find better dividend stocks with that 3.1% yield.
As for 3M (MMM), I actually love this company. It’s a great conglomerate that operates in many sectors, performs well, has been around forever, and is seeing gains in good places. While it struggles in emerging markets, it came in with a 4.5% organic growth in the EMEA region.
Operating income recently came in with a 9.4% increase. However, MMM stock’s Latin American market is expected to see an 8% decline in revenue. I’m objecting to 2.6% yield strictly on the basis of valuation. It trades on 17 times earnings when EPS is slated to grow 11.5%.
So, whether you’re looking for yield or protection, avoid these stocks. They may be dividend stocks, but you can easily find better picks for your portfolio.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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