With the likelihood of a trio of rate hikes expected this year, dividend stocks have earned a little more than their fair share of bad press. See, as is the case with bond prices, higher interest rates push the value of dividend stocks downward.
That’s not the only headwind working against some of these income-oriented investments, however, which has struck even the bluest of blue-chip dividend stocks. A handful of well-known dividend-payers that people largely own for their payouts may prove surprisingly disappointing for the foreseeable future.
Either these companies can’t afford to continue the payout at current levels, they’re overvalued or these outfits are on the verge of cyclical problems. In some cases, more than one liability may apply.
With that as the backdrop, here’s a closer look at seven blue-chip stocks income seekers may want to avoid until something significant changes; that change may well include a sizeable price setback.
Dead-Weight Dividend Stocks: Ford (F)
Why It’s Dead Weight: Lower profits incoming
More of the same could prove to be a very good year for the company, and the current trajectory is a compelling one … particularly if Trump can truly put the U.S. economy in higher gear and more money in people’s pockets.
Investors may not want to put the cart too far in front of the horse, however. Any impact Trump may have could take months if not years to reach full speed. A big chunk of the Trump plan calls for Ford and its peers to keep production here at home, where it costs more. That eats into earnings. Profit margins are already a narrow 4.7%, and even-thinner margins won’t exactly give the carmaker a major motivation to share more of the wealth with shareholders.
That’s not to say the current quarterly dividend of 15 cents per share is in jeopardy. It is to say, though, the recent rise in the value of F shares (up 11% since the election) could be tough to justify in the foreseeable future. Remember, even Ford itself warned in September that its 2017 profits would roll in lower than 2016’s, as bigger-picture demand continues to deteriorate. Not that much has changed for the better in the meantime.
Dead-Weight Dividend Stocks: Caterpillar (CAT)
Why It’s Dead Weight: Deterioration of mining; Hefty payout ratio
The headwind Caterpillar Inc. (NYSE:CAT) has faced since 2015 is well documented. Not only did a deterioration of the mining and drilling business take a toll on the company’s top and bottom line, the U.S. dollar’s multi-year ascension has made it nearly impossible for Caterpillar’s all-important overseas customers to afford its equipment. It’s barely broken even over the course of the past four reported quarters, versus 2014’s net income of $3.7 billion.
This hasn’t prevented CAT from paying a dividend, even though doing so hasn’t always been easy over the course of the past couple of years. In fact, Caterpillar’s continued increase in its payout even when things were fiscally lean is admirable, even if a bit uncomfortable. Caterpillar is paying 77 cents per share now, versus only 70 cents per share two years ago.
But the budding economic revival and recovering commodity prices will turn the company’s fortune around before time catches up with the company? Maybe. But, not only has the dollar not peeled back to more beneficial levels for the company, it actually ran to new multi-year highs late last year. That means at least part of the company’s headwind has persisted through the end of last year. And the expectations aren’t high to begin with. The pros expect earnings to fall from 74 cents per share to 66 cents for last quarter, with sales expected to fall similarly. The current quarter results will feel that pain as well.
The greenback is largely expected to pull back as 2017 wears on, but there’s not a lot for CAT shareholders to be excited about at least through the next quarterly report.
Dead-Weight Dividend Stocks: Ameren Corp (AEE)
Why It’s Dead Weight: Historically low yield
When most investors think of dividend stocks, “Steady Eddie” utility stocks often come to mind first. And well they should. Cars and computers may be cyclical, but consumers always keep the lights on.
And of the top blue-chip dividend stocks within the utilities sector, Ameren Corp (NYSE:AEE) is the creme of the crop, with a 3.4% yield from a non-growth business. Its dividend coverage ratio (the amount of profits dished out as dividends) of 65% is slightly lower than the industry norm of 67%; and better still, the $12 billion outfit has been steadily increasing its payout since 2011. Investors are looking for more of the same increases going forward.
So what’s wrong with AEE as an income-oriented investment? The stock’s 65% gain over the course of the past four years — and the 23% gain just since the January 2016 low — has far exceeded dividend growth during that time, pushing the yield for the company to historically low levels.
Granted, sometimes you have to pay for (or make sacrifices for) a quality name like Ameren. This isn’t one of those times. There are other utility stocks out there that are just as strong that pay a higher yield. As the markets start to realize it, AEE is apt to be pressured lower.
Dead-Weight Dividend Stocks: GlaxoSmithKline (GSK)
Why It’s Dead Weight: Lackluster pipeline
With a current yield of 4.7%, GlaxoSmithKline plc (ADR) (NYSE:GSK) has superficially has earned a spot on the market’s short list of top dividend stocks. Look beyond the snapshot, however, and you might not like what you find.
There’s a reason GSK shares have barely broken even over the course of the past year, are down 9% for the past couple of years, and are in the red to the tune of 26% since this point in the year 2014. That is, GlaxoSmithKline has one of the least compelling drug R&D pipelines in the business.
To its credit, it is getting better. Its efforts to target the OX40 protein on cancer cells holds promise, and it’s got two HIV drugs in phase-3 trials that are showing great results. Its shingles vaccine appears to work quite well too.
A closer look at each of those drugs, their prospects and their competition, however, takes a great deal of the shine off. The shingles vaccine Shingrix, for instance, will have to compete with an established drug from Merck, while its flagship HIV development is a drug taken in tandem with a Johnson & Johnson treatment, cutting into its total revenue potential.
GlaxoSmithKline doesn’t have any breakout drugs in the works, and even fewer of the items in its pipeline are in a position to bolster revenue in the early part of this year.
Dead-Weight Dividend Stocks: IBM (IBM)
Why It’s Dead Weight: Eroding profitability
Last month, International Business Machines Corp. (NYSE:IBM) logged its eighteenth straight quarter of year-over-year declining revenue. The earnings trend hasn’t fared much more impressively.
Yet, last quarter’s numbers offered a glimmer of hope in that the deterioration of revenue seems to have stabilized, and a number of massive initiatives has led to talk of a turnaround that doesn’t seem illegitimate. Between that and the 3.3% yield it currently sports despite a 28% rally since early January of 2016, ol’ “Big Blue” might just look like one of the market’s top blue-chip dividend stocks again.
Don’t confuse “better” with “good,” however, and don’t confuse one or two improved quarters with a trend. As Credit Suisse analyst Kulbinder Garcha explained last month, “[O]ur closer examination highlights that a series of non operational, non recurring items are supporting the EPS. We believe the structural profitability may continue to erode.”
Dead-Weight Dividend Stocks: BP (BP)
Why It’s Dead Weight: Oil uncertainty; Unwieldy payout ratio
With a current dividend yield of 6.3% and the prospect for higher crude oil prices, oil giant BP plc (ADR) (NYSE:BP) makes for an interesting prospect. When one takes a closer look at BP’s books though, red flags start to wave.
Yes, BP has swung back to profitability after getting hit hard — along with oil prices — in early 2016, thanks to the 100% rebound crude has logged over the course of the past twelve months (almost to the day). Goldman Sachs expects oil prices to at least hold steady for the foreseeable future, bolstering the bullish argument for BP.
It’s going to take a lot more than “holding steady” from oil prices for BP to be restored as one of the market’s top dividend stocks, however. Last quarter’s earnings of 29 cents per share was the most profitable in the past four quarters, yet the company has continued to dish out a quarterly dividend of 59.5 cents per share.
How does that work for that long? BP is borrowing to keep the dividend payments going.
If the profit level were anywhere close to the payout and/or if crude oil was destined to move to a price of $100 per barrel in the near future, it may be worth considering. Neither of those conditions are in sight, however, and the market is starting to put two and two together.
Dead-Weight Dividend Stocks: Altria (MO)
Why It’s Dead Weight: Expensive; Slow growth
Last but not least, while Altria Group Inc (NYSE:MO) has historically been one of the quintessential dividend stocks (currently paying out 3.6%) and has somehow found a way to continue growing despite the advent of e-cigs and outright cessation efforts, time has been catching up with the company. Indeed, it seems to have caught up with MO headed into the thick of 2017.
It’s a premise easy to counter just by pointing out how Bank of America analysts recently upgraded Altria to a “buy” and that its iQOS vaporizer will likely win the FDA’s approval as a safer alternative to actually burning tobacco.
There’s more bark than bite to the optimism, though.
Altria is still fighting an uphill battle it’s ultimately going to lose, and the stock’s price has rallied a lot faster than earnings have, or will in the foreseeable future. Last year’s 16% rally from MO has left the stock at a trailing price-earnings ratio of 25.4, and a forward-looking P/E of 20.3. Once traders figure out earnings only grew 8% last year and will likely only grow 10% this year (and that assumes iQOS is a hit), shares are apt to see pressure.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.