Don’t think that just because a company pays a dividend, and has done so for many years that the dividend is safe. Over the years, we have witnessed companies that were seemingly “safe” forced into reducing or eliminating their dividend altogether.
While Chesapeake Energy Corporation (NYSE:CHK) has had its struggles in recent memory, the stock used to pay a dividend upward of 2.5% at one point.
Without a dividend today, it is clear that the company’s bad investments and debt forced management to suspend the payout altogether. Granted, CHK may seem like the outlier, but it happens more than you would think.
With that said, I am looking at dividend stocks that could be at risk. These may not happen this year, maybe not even the next … but the longer they operate the way they are, the closer they get to the danger zone.
Those operations could eventually cause a reduction, even a suspension of their respective dividends.
Dividend Stocks to Sell: BP (BP)
Dividend Yield: 7.2%
BP plc (ADR) (NYSE:BP) pays a dividend of 7.2%. With BP reducing its capital expenditures and having $20 billion in cash and equivalents, no one seems to think its dividend is at risk.
BP has said on multiple occasions that even with its restructuring and more thrifty approach, however, it still needs crude oil prices to stay above $55 for full dividend coverage.
With crude prices currently at $44, and showing no signs of surpassing $55 any time soon, one has to wonder when BP will reduce its already high dividend.
After all, $55 only covers the dividend payments, what about capital expenditures? It seems if BP does not make a move to reduce the dividend, it could cause reductions in credit rating and increases in debt.
Dividend Stocks to Sell: GSK
Dividend Yield: 5.12%
GlaxoSmithKline plc (ADR) (NYSE:GSK) pays a very high 5% yield, but has historically been very unpredictable with its dividend payments. The company has lost patent protection on several of its best-selling drugs, including Advair, and has since increased its R&D budget to find a solution to falling sales.
Furthermore, margins have been on the decline and debt of $20 billion remains very high.
With GSK needing $5 billion just to cover its dividend, investors should not be shocked if GSK starts lowering the payout so that it can invest more resources in research and development and possibly mergers and acquisitions.
Dividend Stocks to Sell: Seagate (STX)
Dividend Yield: 7.1%
Seagate Technology PLC (NASDAQ:STX) has recovered much of the value it lost last year. The hard disk drive market continues to be under pressure, however, with Seagate on pace for its fifth consecutive year of revenue declines, despite using M&A to boost sales.
In addition to revenue declines, profit margins continue to fall, and its debt-to-asset ratio has risen from 25% to 50% over the past four years. Considering that Seagate’s earnings barely cover its dividend, there is a good chance the company will reduce its payout to protect its credit rating.
With a yield of 7%, STX could lower its payout and still be a good dividend stock.
Dividend Stocks to Sell: Frontier Communications (FTR)
Dividend Yield: 9.9%
Frontier Communications Corp (NASDAQ:FTR) is currently paying a near 10% dividend yield, but it won’t be that high for long. After a costly acquisition of Verizon Communications Inc. (NYSE:VZ) assets, Frontier’s debt-to-asset ratio now sits over 60% with $18 billion in total debt.
What makes matters worse is that FTR has free cash flow of less than $200 million. Yet, it costs Frontier over $700 million to maintain its dividend.
Even if Frontier’s free cash flow were to rise 400%, it would still be hard to justify the company’s current payout. With interest rates expected to rise, it won’t be long before Frontier is forced to make a big cut to its industry leading yield.
Dividend Stocks to Sell: Blackstone Group (BX)
Dividend Yield: 6.6%
Blackstone Group LP (NYSE:BX) is an asset management firm that pays a yield of 6.7%. Not only does the company have nearly $7 billion in debt, but like FTR, its free cash flow does not support the current payout. Furthermore, BX does not have a good history of consistent, predictable dividends.
Blackstone has earned less than $1 billion in free cash flow over the past year. Yet, it has paid $2.5 billion to fund its dividend. That’s a formula that does not last long. When you incorporate the risk of rising interest rates on all the debt BX uses to fund investments and pay its dividend, there is a good chance that Blackstone will be forced to make cuts sooner rather than later.
Dividend Stocks to Sell: Williams Companies (WMB)
Dividend Yield: 2.7%
Williams Companies Inc (NYSE:WMB) has already cut its dividend from 64 cents per share to 20 cents a share. Thankfully for WMB stock owners, this is something many expected. While WMB is down 34% over the past year, it has done fairly well during 2016 despite the cut.
However, I don’t think it can manage a 20-cent payout. Williams Companies had free cash flow of $77 million over the last year, and its dividend payout was almost $2 billion.
Even after WMB reduces the payout by two-thirds, the current dividend is still too high. WMB can not afford it, and ultimately the dividend will be lowered even more.
Dividend Stocks to Sell: Centurylink (CTL)
Dividend Yield: 8%
CenturyLink Inc (NYSE:CTL) just announced plans to layoff thousands of workers in an effort to reduce costs. Like Frontier, CenturyLink provides a lot of legacy telecom services, like landline phone service. It is a company that continues to operate below expectations, but has kept shareholders happy with an 8% yield.
That yield is not sustainable. Yes, CTL creates enough free cash flow to afford its dividend. However, CTL also has nearly $20 billion in debt and costs will rise with interest rates. Given that CTL is already cutting costs, it may not be long before the company starts cutting its dividend.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.