Dividend-paying stocks definitely look more attractive in today’s volatile markets. It also helps that interest rates have been falling (at least on the higher end of the yield curve), making dividend stocks yet more interesting.
But investors should still be cautious. For the year so far, we’ve seen some mega companies slash their payouts. Just look at GE (NYSE:GE) dropping theirs to a penny and Anheuser Busch Inbev (NYSE:BUD) halving theirs. In fact, these stocks have suffered major drops in their values after lowering the payouts.
This is why it is a good idea to do some homework before making a purchase. What do the long-term prospects look like for the company? How secure are the cash flows? How long has a company been paying its dividend — and have there been consistent increases?
Getting answers to these questions can save you from some potential landmines.
OK, so what are some of the stocks that pay dividends that may, well, trim them? Here’s a look at seven:
Barnes & Noble (BKS)
If Barnes & Noble (NYSE:BKS) were a book, it would not have a happy ending. It’s a story of how it failed to beat its arch rival, Amazon.com (NASDAQ:AMZN). Consider this: BKS has a market cap of $482 million. By comparison, AMZN’s is at $750 billion.
BKS has tried to find ways to innovate, such as with its website, apps, and NOOK tablets and eReaders. Yet nothing has seemed to work.
In the latest quarter, the net loss came to $27.4 million and comparable sales dropped by 1.4%. There was also a 2.5% decrease in total sales to $771.2 million.
True, there is a bright spot. It does look like BKS may be looking to sell itself. But given the company’s situation, it could be tough to fetch much of a premium. And if there isn’t a sale, it may be difficult to continue paying the dividend, as the company will need to find more ways to cut costs.
Whenever a dividend yield gets into the double digits, there should be an alarm bell for investors. This is usually a sign that the payout will not last long. Let’s face it, the board of directors will have a tough time agreeing to shelling out so much cash, especially since Wall Street is already fairly skeptical.
This is the predicament for GameStop (NYSE:GME). The 11.9% yield does not look sustainable. After all, during the latest quarter, the company provided awful guidance. The forecast for fiscal 2018 is for a decline in sales of anywhere from 2% to 6%.
The big issue with GME is that gamers are increasingly migrating to digital downloads and online access. This is a secular trend that will make it extremely tough for the company to grow the top line.
What about a buyout? This appears to be the main potential catalyst for GME stock right now. But given the company’s ominous prospects, it could be difficult to find a buyer.
According to Benchmark analyst Mike Hickey: “We believe GME has zero terminal value, and we see financial performance and valuation suffering over the long term.” His priced target is currently at $10, which assumes 22% downside from current levels.
Ford (NYSE:F) CEO James Hackett has been taking bold actions with the company. Of course, he has been aggressive with cost cutting. The goal is to achieve about $25.5 billion in reductions over the next four years. Hackett also plans to focus more on using common components for vehicles and even eliminate the sedan business in North America (except for the Mustang and the Focus Active crossover).
To stay competitive, Ford will need spend much more on new technologies, such as autonomous systems. This category is far from cheap, as the company will need to compete for engineers with Silicon Valley firms.
In light of all this, Ford’s dividend payout does seem out of sync. Might it be better to use this money for investment?
I think so. Besides, if the economy slows down and car sales continue to trail off, Ford may have little choice but to scale back the dividend.
WPP (NYSE:WPP) is the world’s leading ad company. But unfortunately, things have not been going well lately. In April, CEO Martin Sorrell left the company because of allegations of personal misconduct. He had been with the company for 33 years.
But this was only one of the problems. Keep in mind that WPP’s growth has been coming under pressure. In the latest quarter, the company reduced its full-year guidance, with net sale projected to fall by 1%.
WPP must deal with challenging headwinds. First of all, mega tech operators like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) have been taking share away from traditional segments, such as TV. Next, major brands are looking to bring their ad operations in-house, avoiding the hefty fees of agencies.
It’s a tough spot for WPP and so far, the company really has not put together a compelling strategy. So if things continue to languish, it will not be easy to justify the high dividend payout.
Telecommunications companies generally have generous dividend payouts. Then again, these companies have large user bases that pay recurring subscriptions. But in the case of CenturyLink (NYSE:CTL), the dividend is a bit extreme at 13%. Again, when the payout gets to this level, there will often be a cut.
Note that the debt level is a staggering $35.7 billion (a big part of this came with the acquisition of Level 3 Communications). Might it be smarter to have a lower dividend — to make sure that the debt service is more secure? This seems reasonable to me. Consider that within a couple years, the company will need to start paying down the principal on its debt.
CTL also is having trouble ginning up growth. During the latest quarter, revenues fell by 4% to $5.8 billion.
Maxar Technologies (MAXR)
Maxar Technologies (NYSE:MAXR) is a space technology company, which manufactures earth observation systems, radar and satellites. But in late October, the company’s shares fell back to earth — plunging more than 40% on its latest earnings report.
While Wall Street was expecting a juicy profit, MAXR instead announced a stunning loss — a hefty $508 million. True, part of this was due to non-cash charges. But even when making adjustments, MAXR still lost money.
What’s more, on a full-year basis, the company is predicting a 6.5% drop in revenues. There will also be unexpected increases in capital expenditures, which could wipe out free cash flows.
Given all this, it could put pressure on the dividend yield, which is one of the highest in the tech industry.
British American Tobacco (BTI)
British American Tobacco (NYSE:BTI) is a global powerhouse in the smoking business, with operations in over 200 countries. The company also bolstered its business – in 2017 – with the acquisition of Reynolds American. Some of the brands include Lucky Strike, Pall Mall and Newport. BTI also has a suite of offerings for e-cigarettes like Vuse.
Despite all this, the market for smoking continues to see declines. And this is likely to continue for some time.
But there is another big issue: The FDA wants to put a ban on the sale of menthol cigarettes because of concerns with teen smoking. The agency is also taking steps to crack down on e-cigarettes.
While BTI has lots of experience dealing with regulatory problems, the recent threats could prove much more challenging. A ban of menthol cigarettes would take a big chunk out of BTI’s revenues for Newport. This business accounts for 55% of BTI’s U.S. volumes. No doubt, the loss of this would make it incredibly difficult to maintain the high dividend payout.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.