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All Contents © 2019The Kiplinger Washington Editors
By Kathy Kristof, Contributing Editor
| August 25, 2016
With interest rates in the basement and likely to stay there for some time, investors have, for good reason, flocked to dividend-paying stocks. But demand has pushed up the prices of many popular payers to possibly unsustainable levels. These stocks could be vulnerable to steep declines.
People who can live off of their dividend income and can ignore share-price fluctuations may not have to worry much about a market reversal. After all, given enough time, the price of a good company will eventually recover. But investors who can’t stomach a downturn—even if it proves temporary—may want to lighten up on some overpriced dividend stocks.
We’ve identified five dividend payers that look overvalued and that you should consider unloading. Keep in mind that if you own these stocks in a taxable account, selling could generate capital gains, on which you might have to pay income taxes.
All prices and returns are through August 19. Price-earnings ratios are based on estimated earnings over the next four quarters.
Courtesy Campbell Soup
Market capitalization: $18.8 billion
Annual dividend rate per share: $1.25
Dividend yield: 2.0%
Price-earnings ratio: 20
Investors have taken comfort in Campbell Soup and the comfort foods it produces for more than a century. But Campbell, which makes its eponymous soups, Pepperidge Farm baked goods and Prego pasta sauces, among other things, is a mature company with stagnant sales. It essentially has been able to generate modest earnings gains by cutting costs. And although analysts see earnings rising by 6% in the fiscal year that ends in July 2017, they expect revenues to inch up by just 1%.
Tepid growth notwithstanding, Campbell’s shares have returned 24% over the past year. The stock, which boasted a dividend yield of 4.2% at the end of 2012, now pays just 2.0% (yield is calculated by dividing the annual dividend rate by the share price). That’s less than the 2.2% yield of Standard & Poor’s 500-stock index and the 2.6% yield of the average consumer-staples stock. Moreover, Campbell hasn’t raised the payout since 2013. And at 20 times estimated year-ahead earnings, Campbell’s P/E is higher than the overall market’s P/E of 17.
SEE ALSO: 4 High-Yield Stocks Worth the Risk
Courtesy Church & Dwight
Market capitalization: $12.7 billion
Annual dividend rate per share: $1.42
Dividend yield: 1.4%
Price-earnings ratio: 27
Church & Dwight, maker of Arm & Hammer and OxiClean products, has long been a stock market star, thanks largely to the company’s ability to turn modest upticks in sales into impressive profit gains. The stock’s price has doubled since October 2012. But over that period, the dividend rate has climbed only half as much, from 96 cents per share to the current $1.42. As a result, the yield is now just 1.4%. Meanwhile, earnings have climbed just 11% annualized over the past four years, and analysts expect slightly slower growth over the next few years. The stock sells for a rich 27 times estimated earnings.
Simon Shoucair, an analyst at Value Line, says Church & Dwight is a fine company, but at today’s price, he waves investors away from the stock. “Those seeking to buy and hold should look elsewhere,” he says.
SEE ALSO: Is There a Bubble in Dividend Stocks?
Courtesy Consolidated Edison
Market capitalization: $23.3 billion
Annual dividend rate per share: $2.68
Dividend yield: 3.5%
Price-earnings ratio: 19
Shares of the big New York City-based utility have delivered un-utility-like results lately, soaring 34% since June 2015. Like most utilities, Con Ed is a slow grower. Earnings have climbed at an annualized pace of 3% over the past five years, and analysts see them edging up at just 2% annually over the next few years. Meanwhile, the dividend has risen at annual rate of just 2.2% over the past five years. With a P/E of 19, the stock looks precarious, says Travis Miller, director of utilities research at Morningstar.
Moreover, regulators in New York, where Con Ed does the bulk of its business, are rethinking the utility industry rulebook. In a state already known for tough regulation, the risk of even tighter standards makes Con Ed’s rich valuation seem foolhardy, says Miller. He suggests that investors step to the sidelines until the regulatory outlook clears up.
torbakhopper via Flickr
Market capitalization: $29.3 billion
Annual dividend rate per share: $1.24
Dividend yield: 2.4%
Price-earnings ratio: 23
Shares of Sysco, the nation’s leading distributor of food and food-related equipment and supplies to restaurants, hospitals and other institutions, have been on a tear. Year to date, the stock has returned 29%, far outpacing the overall market’s advance. Because the share price has been climbing much faster than Sysco’s dividend, the stock, which yielded nearly 4% at the end of 2013, now pays 2.4%.
Sysco is a steady grower. Earnings from operations rose 10% in the fiscal year that ended June 30, and analysts see a similar increase in the current fiscal year. To be sure, Sysco’s predictable earnings and healthy balance sheet provide comfort to risk-averse investors. But Value Line analyst Robert Greene says the stock’s sizzling performance, which has pushed up the P/E to 23, leaves little room for near-term price appreciation.
SEE ALSO: 6 Good Dividend Stocks That Yield 5% or More
Seth Tisue via Wikipedia
Market capitalization: $21.6 billion
Annual dividend rate per share: $1.36
Dividend yield: 3.2%
Price-earnings ratio: 19
Xcel Energy is the parent of utilities that provide electricity, natural gas or both in the central U.S.—Colorado, Michigan, Minnesota, New Mexico, Texas, Wisconsin and the Dakotas. The company has done a good job of working with regulators to produce steady profits, and it in turn has rewarded investors with regular (though modest) dividend hikes.
But the geographic regions Xcel’s utilities serve aren’t growing much, so they’re likely to produce tepid gains in both revenues and earnings. The company is now waiting to hear whether Minnesota regulators will approve rate hikes that could help fuel future earnings and revenues, but that decision isn’t likely to be made for another year.
Yet, like many other utilities, Xcel’s stock has been booming—the shares have roared ahead 33% since June 2015. Morningstar’s Miller says the stock’s price is 26% higher than he thinks the company is worth. And Value Line analyst Paul Debbas says the stock’s long-term total-return potential is “negligible.”
QUIZ: How Well Do You Know Dividends?
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