11 Dividend-Paying Stocks You Should Think Twice About
Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite their dividend programs.
Income investors have been forced to become far more selective about the dividend-paying stocks they stash in their portfolios.
More than 60 S&P 500 firms have cut or suspended their dividends in 2020. In some cases, the companies involved have been trying to maintain their financial flexibility in the midst of a pandemic-sparked recession, while others have simply had no choice but to cut all but the most vital of cash expenditures.
While the market has come roaring back from the depths that prompted those dividend-paying stocks to cut back, we're not out of the woods yet. A number of dividend stocks still look like potential payout-cut risks, while others simply look unattractive given lackluster recovery prospects.
The DIVCON system from exchange-traded fund provider Reality Shares can help investors weed out some of these riskier dividend payers. This system uses a five-tier rating, from 1 to 5, to gauge companies' dividend health. A DIVCON 5 rating indicates not just a healthy dividend, but a high likelihood of dividend growth. DIVCON 1 dividend stocks, on the other hand, are the likeliest to cut or suspend their payouts.
Within each DIVCON rating is a composite score based on factors including free cash flow-to-dividends, profit growth, buybacks as a percentage of dividends and more.
Here are 11 dividend-paying stocks that you should avoid at the moment. Each of these stocks has a DIVCON rating of either 2 or 1, awarded based on various metric readings that point to dividend and other difficulties in the months ahead. Long-term investors are better off focusing their efforts (and money) on dividend investments with more stability and better prospects.
Data as of Sept. 20. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks listed in reverse order of DIVCON score.
- Market value: $10.1 billion
- Dividend yield: 0.9%
- Sector: Health care
- DIVCON rating: 2
- DIVCON composite score: 45.50
Very few of the factors taken into account to evaluate Dentsply Sirona (XRAY, $46.33), a manufacturer and distributor of dental supplies and equipment, stand out as arguments why you shouldn't invest in this dividend-paying stock.
The biggest issue is that Dentsply Sirona's dividend is expected to grow by 3.7% over the next 12 months. The average dividend growth rate of the top 10 health care companies is 20% over the next year, so XRAY looks weak by that measurement. The fact that its earnings have been eaten up during the pandemic isn't conducive to the dividend's health, either.
In the second quarter ended June 30, Dentsply Sirona's sales declined by 51.4% to $490.6 million. The company's sales were heavily impacted by COVID-19 and the closure of most dental clinics for a portion of the quarter. On the bottom line, it had a non-GAAP (Generally Accepted Accounting Principles) net loss of $40.2 million in the second quarter, down significantly from a profit of $147.9 million in the same period a year earlier.
Despite the mediocre comparison with other health care companies when it comes to dividends and earnings per share growth over the next year, analysts are relatively upbeat about the company. Of the 17 analysts covering Dentsply Sirona, nine rate it Overweight or a Buy, with the other eight giving it a Hold rating. But their 12-month estimate of $49.23 indicates there's little upside from current prices.
XRAY still has a safe-looking dividend based on projected profits. But it's doing business in a shellacked industry that could continue to struggle until a vaccine is approved and widely distributed. Just monitor this one closely – it eventually could be a bounce-back play thanks to pent-up demand.
- Market value: $2.8 billion
- Dividend yield: 0.80%
- Sector: Utilities
- DIVCON rating: 2
- DIVCON composite score: 43.00
Reno, Nevada-based Ormat Technologies (ORA, $55.38) operates geothermal power plants in the U.S., Guatemala, Guadeloupe, Honduras, Indonesia and Kenya. These plants have a total capacity of 933 megawatts of power generation with more expected in the next few years.
Let's be clear: The company isn't doing poorly. Ormat's second-quarter results reported in August showed a 5% year-over-year decline in revenues, to $174.9 million, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) actually grew 3.2% to $97.9 million.
Ormat also continues to focus on internal projects to grow its geothermal portfolio. In July, it acquired a battery storage asset from AltaGas for $43.9 million. The acquisition was its first in California, adding to its battery storage assets in New Jersey, New England, and Texas.
Of the 11 companies in this article, Ormat could be the best of the worst.
However, the company's quarterly dividend of 11 cents per share yields less than 1%, and that's after shares have lost 26% year-to-date. Moreover, Ormat has left its dividend flat this year, stopping a multiyear streak of payout growth, and it's uncertain when it will start pumping up its dividend once more.
Investors typically are looking for more yield from dividend-paying stocks in this sector. If you're a traditionalist, here are some more generous utility stocks to look at.
- Market value: $4.0 billion
- Dividend yield: 5.3%
- Sector: Technology
- DIVCON rating: 2
- DIVCON composite score: 35.25
A $10,000 investment in Xerox (XRX, $18.92) in 1995 is worth about $7,880 today. By comparison, the same investment in Microsoft (MSFT) over the same period is worth $815,000. That's how badly Xerox has underperformed over the past two decades.
XRX still pays a dividend, at least. Shareholders receive a shiny quarter per share every three months, so if you buy today, you'll get a 5%-plus yield for your trouble.
But that might be all you get.
While the company has become more adept at squeezing profits out of its operations, revenues have been in steady decline for years. And earnings, which have been understandably slammed by COVID-19, are expected to rebound (to $2.23 per share) in 2021, but nowhere near last year's figures ($3.55).
If you're looking for a silver lining, billionaire investor Carl Icahn has recently upped its stake in the maker of printers and photocopies from 7.7% to 12.8%. Icahn is the company's largest shareholder, and has held a stake since 2015. (Analysts suggest Icahn has lost about a third of his investment in Xerox over the past five years.)
The latest shares were bought at an average price of $16.31, a couple of dollars off its 52-week low, and the stock has recovered some losses thanks to Icahn's boost of confidence.
Even then, realize that Xerox's primary products are in far less demand because of the suddenly rapid adoption of work-from-home policies – a trend that might reverse somewhat coming out of the pandemic, but unlikely back to pre-pandemic levels.
- Market value: $15.7 billion
- Dividend yield: 5.4%
- Sector: Utilities
- DIVCON rating: 2
- DIVCON composite score: 34.25
Ohio-based utility FirstEnergy (FE, $28.96) is wrapped up in a U.S. Department of Justice investigation into whether the company funneled $60 million to a nonprofit controlled by former Ohio House Speaker Larry Householder, as well as a parallel investigation by the Securities and Exchange Commission. This money allegedly was used to ensure the passage of a $1.3 billion bailout of two nuclear power plants formerly owned by FirstEnergy.
It's important to note that FirstEnergy is cooperating with authorities and has not been charged concerning the investigation into this matter.
As a result of this legal investigation, the class-action lawyers have come out of the woodwork to find investors to join one or more lawsuits. The lawsuits argue that FirstEnergy made materially false and misleading statements during a three-year year period starting Feb. 21, 2017, and ending July 21, 2020. As a result, FirstEnergy insiders could sell more than $17 million worth of shares at inflated prices.
"(FirstEnergy) cannot credibly say they're completely innocent bystanders even if they did not break the law," Case Western Reserve University Professor Emeritus of Law Jonathan Entin said in late August. "It's really hard to believe they were completely ignorant of what was happening."
Since the FBI filed an 82-page criminal complaint against Householder and four associates in July, FirstEnergy's stock has lost nearly a third of its value. The good news? The dividend now yields more than 5%. But you're dealing with a company facing two high-level investigations – one that DIVCON notes has a sub-100% free cash flow-to-dividend ratio (meaning its free cash flow isn't covering its payout), low dividend-growth potential and a negative Bloomberg Dividend Health score.
A number of dividend-paying utility stocks are worthy of long-term consideration from buy-and-hold investors. Right now, FirstEnergy isn't among them.
- Market value: $2.0 billion
- Dividend yield: 6.3%
- Sector: Materials
- DIVCON rating: 1
- DIVCON composite score: 31.00
Chemical manufacturer and distributor Olin (OLN, $12.66) stands out among the dividend-paying stocks on this list because of its payout longevity. The company distributed its 375th consecutive quarterly dividend on Sept. 10 – an indication of how serious the manufacturer of chemical products and ammunition is about rewarding shareholders.
Unfortunately, while Olin has paid dividends for almost 94 consecutive years, it isn't a Dividend Aristocrat. To be one, you must have increased your annual dividend payment for 25 consecutive years and be a component of the S&P 500.
Olin is neither. It has paid out 20 cents per share quarterly since its March 2000 payment; before that, it was paying 30 cents quarterly for a few years.
In 2020, Olin likely will pay out some $126.3 million in dividends based on 157.9 million shares outstanding. Looking back at the trailing 12 months ended June 30, however, Olin's dividend payments represent 158% of its $80 million in free cash flow. That means OLN would have to add to its $4.5 billion in long-term debt to keep paying out its dividends. Based on its 94-year history, that's a real possibility.
The yield is wonderful, at more than 6%. But equity investors need to be concerned about total return – prices and dividend income. Over the past decade, OLN shares are actually down about 7% on a total-return basis.
The company may see some pick-up when the economy does, but analysts' consensus estimates say Olin will only grow profits by 2.3% annually over the next five years, suggesting lackluster growth prospects longer-term.
- Market value: $5.0 billion
- Dividend yield: 5.7%
- Sector: Financials
- DIVCON rating: 1
- DIVCON composite score: 27.00
One of the DIVCON metrics used to develop each stock's composite score is the net income-to-total assets (NITA) ratio.
Of the 100-plus financial stocks covered by the DIVCON ratings, Invesco (IVZ, $10.98) has a NITA of 1.9. This means for every $100 of assets the asset manager holds on its balance sheet, it earns $1.90. For comparison's sake, T. Rowe Price (TROW) has a NITA of 22.2, meaning it earns $22.20 for every $100 in assets.
That's the difference between winning and losing in the asset management industry.
Invesco's performance hasn't been good in either the short or long term. IVZ is off 37% year-to-date, it has lost 12.8% annually over the past five years, and it's marginally negative across the past decade – including dividends. That's significantly worse than the financial sector across every time period.
Another way to illustrate how poorly Invesco has performed over the past few years is to look at assets under management.
On Aug. 31, 2020, it had total assets under management of $1.245 trillion. On Aug. 31, 2015, it had total assets under management of $776.4 billion for a five-year compound annual growth rate of 9.9%. By comparison, T. Rowe Price had $725.5 billion in assets under management in September 2015, and $1.22 billion at the end of June 2020, for an 11.0% CAGR. Or consider that T. Rowe Price squeezed $553.7 million in operating profits from $1.42 billion in revenues during the second quarter, while Invesco managed just $117.1 million in operating income out of nearly identical revenue.
While IVZ boasts a high yield among dividend-paying stocks, there are legitimate reasons to question just how much growth you'll get out of the stock.
- Market value: $7.5 billion
- Dividend yield: 5.2%
- Sector: Consumer discretionary
- DIVCON rating: 1
- DIVCON composite score: 26.25
Newell Brands (NWL, $17.72) – the consumer goods company behind brands such as Paper Mate, Sharpie, Elmer's, Coleman, Rubbermaid, Yankee Candle and many others – paid a 23-cent quarterly dividend Sept. 15. That payout yields more than 5% at current prices.
The biggest issue facing Newell is the amount of debt it carries. That figure was $6.7 billion as of the end of June, or 89% of its current market cap. That factors into the company's low Altman Z-score of 0.36, which implies an elevated risk of bankruptcy in the next 12 to 24 months. On the upside, NWL has reduced that debt by 37% over the past two-plus years through divestitures.
But the dividend remains a significant constraint on the company's ability to grow.
Newell spent $390 million on dividends in 2019, representing 50% of its $779 million in free cash flow. Over the trailing 12 months, Newell's free cash flow has improved to $940 million. With 424.3 million shares outstanding at the end of the second quarter, Newell should reduce its free cash flow payout for dividends to 42%.
However, during the second quarter, Newell's operating income fell by 29.4% year-over-year to $163 million, while its sales fell 14.9% to $2.1 billion. All five of its operating segments suffered sales declines in the quarter, with its learning and development segment (its largest by revenue) experiencing a 25.7% drop.
This is a case where shareholders might bemoan a dividend reduction, but freeing up cash flow could help Newell reinvigorate its business.
- Market value: $12.1 billion
- Dividend yield: 9.3%
- Sector: Communication Services
- DIVCON rating: 1
- DIVCON composite score: 25.25
Of the 19 communication services stocks given a DIVCON rating by Reality Shares, Lumen (LUMN, $10.77) – formerly CenturyLink, which changed its name and CTL ticker very recently on Sept. 18 – has the lowest composite score. That's saying something considering some of the other names at the bottom of the list.
Lumen declared its regular 25-cent quarterly dividend on Aug. 20, which was paid on Sept. 11, giving it a 9.1% yield that's also higher than the other 18 names. While tempting, it's important to point out that LUMN also has a low Altman Z-score of 0.78, well below 1.81, the level at which a company is considered distressed and quite likely to enter bankruptcy protection within 24 months.
To give you an idea of CenturyLink's relative financial situation, the communication services stock with the highest DIVCON score is Activision Blizzard (ATVI) at 63.00. This perfectly healthy company has an Altman Z-score of 8.62, more than 11 times greater than CenturyLink's.
Under the rebranded Lumen, LUMN will have three different operating segments: Lumen Technologies, CenturyLink and Quantum Fiber.
"For the past three years we have been reinventing ourselves and repositioning the company to deliver on a brand-new promise: Furthering human progress through technology," says Lumen CTO Andrew Dugan, who held the same title at CenturyLink. "We have been considering this change for many months. We are ideally positioned to help resolve the biggest data and application challenges of our time – this is why now is the right time to introduce Lumen."
Whether the new branding can help turn around the actual business remains to be seen. For now, however, analysts expect revenues to decline this year and next, with profits edging higher in 2020 before flattening out in 2021. That's not what you want to see when seeking out dividend-paying stocks to buy.
- Market value: $36.4 billion
- Dividend yield: 5.4%
- Sector: Consumer Staples
- DIVCON rating: 1
- DIVCON composite score: 20.50
Out of 44 consumer staples stocks in the DIVCON rating system, Kraft Heinz (KHC, $29.74) was dead last as of the end of August.
In early 2019, news stories began to appear in the business media that suggested Kraft Heinz had to do more than cut costs to survive and thrive. It had just cut its quarterly dividend by 36% to 40 cents per share while also taking a $15 billion impairment against its Oscar Mayer and Kraft Brands.
"We believe these impairments validate fears that Kraft Heinz may have been more focused on costs than building brand equity, and even if management now has 'seen the light', we are now concerned that its brands lack the equity to drive pricing power needed to compete and drive growth in a sustainable way," Piper Jaffray analyst Michael Lavery said in February 2019.
It appears that Kraft Heinz has not yet learned its lesson.
On Sept. 15, KHC announced a turnaround plan that includes cutting $2 billion in costs over the next four years. It also has sold part of its cheese business to Lactalis, a French-based company that makes money from cheese, milk, yogurt and other dairy-related products.
The company says it will reinvest some of the proceeds and savings into sales and marketing as it focuses on growing both the top and bottom lines.
Investors have seen this message before, and it didn't go well then.
Meanwhile, based on 1.22 billion shares outstanding, Kraft Heinz will dole out just less than $2 billion in dividends this year. That represents 50% of its trailing 12-month free cash flow of $3.87 billion. While that's sustainable, KHC might be better off earmarking that money for growth.
- Market value: $1.6 billion
- Dividend yield: 4.8%
- Sector: Energy
- DIVCON rating: 1
- DIVCON composite score: 18.75
Murphy Oil (MUR, $10.44) announced April 1 that it would cut its quarterly dividend by 50% to 12.5 cents per share quarterly. It also reduced its capital plan for 2020 by $170 million down to $780 million. That was the second reduction from its original capital plan heading into 2020 of $1.45 billion.
The moves were meant to preserve the Arkansas-based oil and gas company's cash position during the downturn in commodity prices. However, Murphy's new projected annual payout of $77 million is still well more than it can cover, based on trailing 12-month free cash flow of -$120 million. Sure, a turnaround in oil prices could considerably boost Murphy Oil's ability to generate cash, but that's a big if amid a slowing economic recovery.
DIVCON also notes that Murphy Oil has an Altman Z-score of 1.0. That's not the worst score of the 35 dividend-paying stocks it covers in the energy sector, but it is less than 1.81, which is a worrying level.
A reminder: Altman Z-score uses five factors to measure a company's credit strength; a score of 3 or above means a low/negligible probability of bankruptcy over the next 12 to 24 months, 2.99 to 1.81 means a moderate probability and any score of 1.8 or below indicates an elevated likelihood.
And any significant bankruptcy risk shouldn't be taken lightly in this environment. According to the Oil Patch Bankruptcy Monitor, in the first eight months of 2020, the dollar value of North American oil and gas producer bankruptcies totaled $51 billion, more than double the amount for all of 2019 and four times the amount in 2018.
Since 2015, nearly 500 oil and gas companies have filed for bankruptcy. Haynes and Boone LLP, the law firm that publishes the Oil Patch Bankruptcy Monitor, expects defaults to accelerate.
"Prices will probably come up a little bit, but probably not high enough or fast enough for a number of companies that are still going to be filing for bankruptcy," says Buddy Clark, Haynes and Boone's co-chairman of the law firm's energy practice.
Murphy Oil could very well survive this difficult period – and, in fact, a sudden change in fortunes could lead to a sharp spike higher in its depressed shares. However, buy-and-hold investors need to be concerned with dividend reliability, too. Given dividend reductions at blue-chip BP (BP) and Royal Dutch Shell (RDS.B) this year, not to mention Murphy itself having chopped its payout once in 2020, it's clear there are few promises in the energy patch right now.
- Market value: $60.2 billion
- Dividend yield: 0.6%
- Sector: Industrials
- DIVCON rating: 1
- DIVCON composite score: 16.00
Industrial conglomerate General Electric (GE, $6.88) made a bit of a charge in June, moving up to almost $9 before falling back into the low $6s by the end of the summer. The fact is GE faces a long uphill battle to return to its glory days, when it was a dividend superstar.
At the end of August, JPMorgan analyst Stephen Tusa, a long-time GE bear, delivered his latest downgrade of the industrial conglomerate, by stating that GE is worth less than $5 a share and removing his price target on the stock.
Tusa believes GE's lack of guidance provides little visibility over the next three to six months. For this reason, he sees General Electric's business deteriorating over the back half of 2020. Further, he sees no value in owning GE's shares at this point.
Yes, Tusa is much more bearish than other analysts. For instance, while other analysts project that GE will generate positive free cash flow in the second half of 2020, Tusa thinks the company will be FCF-breakeven. Further, Tusa believes GE earnings won't return to normal until 2024. Add to this significant debt:
Several other factors make GE a terrible dividend stock to own right now.
Tusa believes that in the second half of 2020, traditionally GE's strongest half, its free cash flow will hit breakeven. That's much more negative than other analysts who project it will generate positive free cash flow in the second half.
Further, the analyst sees GE's earnings not returning to normal until 2024, more than three years from now. Add to this significant net debt of 34 billion, and investors are looking at a very long climb out of a huge hole.
Things could get better, but at a 0.6% yield, you're not being paid enough to wait and find out.