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Looking for yield in this low interest rate environment can be dangerous, as investors search further and further afield to try and find a return that has not already been pushed down to abnormal levels.

This causes problems as these yields can be extremely risky, not ideal when you're trying to defend your portfolio.

So, here are six companies, which I believe are unable to sustain their dividend payouts based on cash flows.

Seadrill Ltd. (SDRL)

Share Price

EPS ttm

Dividend

Yield

Dividend Cover

$39.6

$13.6

$3.36

8.5%

4

Yielding 8.5%, Seadrill enters an elite club of high yield stocks, however, the high yield can also signifies danger. Having said that, the company's dividend payout covered 4x by earnings per share, so the company passes the first basic dividend strength test with flying colors, but how do the company's cash flows stack up?

Cash Flow Statement

$US Billions

31-Mar-12

30-Jun-12

30-Sep-12

31-Dec-12

31-Mar-13

Net Operating Cash Flow

$2.63

$2.89

$2.45

$1.06

$2.38

Capital Expenditures

-$3.11

$2.77

-$2.00

$0.96

-$2.15

Net Investing Cash Flow

-$2.55

-$1.51

-$1.79

-$1.88

-$6.05

Cash Available For Financing Activities

$0.08

$1.38

$0.66

-$0.82

-$3.67

Cash Dividends Paid - Total

-$2.19

-$2.64

-$2.36

-$3.74

-$2.36

Issuance/(Reduction) of Debt, Net

$1.17

$0.22

$3.31

$2.20

$3.46

Dividend Cover From Cash Available For Financing Activities

0

0

0

0

0

Free Cash Flow

-$2.68

-$2.52

-$1.90

-$3.64

$0.23

[Figures in $US billions. Cash available for financing activities is the sum of operating cash flows after the removal of investing cash flows including CAPEX spending.]

At first glance, it would appear that Seadrill can only cover its CAPEX spending with operating cash flow, leaving very little room for any other activities. Q2 2012 was the only year that the company has had a positive income from CAPEX spending but this did not translate into a positive net investing cash flow.

Seadrill has been forced to borrow for the last five quarters in order to supplement its cash flows, an unsustainable method of balancing the books. Dividend payouts have average $2.7 billion per quarter during the period shown above while operating cash flows, or income have only averaged $2.3 billion, indicating that on average, Seadrill has needed to raid its cash reserves or borrow around $400 million just to be able to fund the dividend.

On average, Seadrill borrowed $2.1 billion a quarter to fund its operations and during the period the company's net debt rose 11% and total liabilities expanded 23%, shareholder equity fell 5%. The company has a net debt to equity level of 2x up from around 1.8x at the beginning of the period.

In my opinion, an unsafe dividend.

FirstEnergy Corp.(FE)

Share Price

EPS ttm

Dividend

Yield

Dividend Cover

$38.3

$1.84

$2.20

5.7%

0.8

Utility company, FirstEnergy is not able to cover its dividend payout from EPS. However, earnings for utility companies are usually hit with high charges for items such as depreciation, which are not included in cash flows and have no material effect on the company's income, which would affect dividend cover.

Cash Flow Statement

$US Millions

31-Mar-12

30-Jun-12

30-Sep-12

31-Dec-12

31-Mar-13

Net Operating Cash Flow

-$413

$475

$1,210

$1,040

$50

Capital Expenditures

-$589

-$412

-$685

-$992

-$853

Net Investing Cash Flow

-$534

-$497

-$989

-$1,170

-$927

Cash Available For Financing Activities

-$947

-$22

$221

-$130

-$877

Cash Dividends Paid - Total

-$230

-$230

-$230

-$230

-$230

Issuance/(Reduction) of Debt, Net

$1,060

$267

$68

$385

$1,030

Dividend Cover From Cash Available For Financing Activities

0.00

0.00

0.96

0.00

0.00

Free Cash Flow

-$1,320

-$167

$299

-$178

-$1,030

[Figures in $US millions. Cash available for financing activities is the sum of operating cash flows after the removal of investing cash flows including CAPEX spending.]

FirstEnergy is spending most of its operating cash flow on CAPEX and as a result, the company has only been able to partially fund its dividend in one out of the five quarters that are displayed above.

Once again the company is borrowing to fill the funding gap. On average, FirstEnergy has borrowed $562 million a quarter to fill the gap between its outgoing cash flow and incoming cash. The borrowing has resulted in net debt rising 10% over the period, debt to equity rising from 1.4x to 1.6x.

Realistically, unless FirstEnergy's income rises significantly, or the company cuts CAPEX spending the dividend is not sustainable at current levels.

Windstream Corporation (WIN)

Share Price

EPS ttm

Dividend

Yield

Dividend Cover

$8.1

$0.27

$1

12.6%

0.3

Windstream Corporation is one of the highest yielding stocks in the S&P 500. However, at first glance, the company cannot cover its dividend payouts with earnings.

Cash Flow Statement

$US Millions

31-Mar-12

30-Jun-12

30-Sep-12

31-Dec-12

31-Mar-13

Net Operating Cash Flow

$438

$389

$406

$534

$304

Capital Expenditures

-$238

-$300

-$338

-$223

-$243

Net Investing Cash Flow

-$175

-$287

-$342

-$295

-$234

Cash Available For Financing Activities

$263

$102

$64

$239

$70

Cash Dividends Paid - Total

-$146

-$147

-$147

-$148

-$148

Issuance/(Reduction) of Debt, Net

($271)

$15

$148

($76)

$7

Dividend Cover From Cash Available For Financing Activities

1.8

0.7

0.4

1.6

0.5

Free Cash Flow

$54

-$51

-$79

$163

-$87

[Figures in $US million. Cash available for financing activities is the sum of operating cash flows after the removal of investing cash flows including CAPEX spending.]

It would appear that the company is struggling to cover its dividend payouts consistently. In three of the last five quarters, the company has not been able to afford its payout and has to borrow to fill the gap.

Although the company paid down debt in Q1 2012 and Q4 2012, the majority of this reduction was than annulled when the company had to borrow in Q2,Q3 and Q1 2013 to fill the gap left by its large dividend payout.

Overall, Windstream cannot afford its payout but if the company trimmed its payout by a third, it would be in a better position and would still offer a payout of $0.66 a share - yielding 8%.

CapLease, Inc. (LSE)

Share Price

EPS ttm

Dividend

Yield

Dividend Cover

$8.6

$0.04

$0.31

3.6%

0.1

As a REIT, CapLease has a large amount of charges that affect its EPS, so I am hesitant to analyze the company's dividend based on EPS coverage.

Cash Flow Statement

$US Millions

31-Mar-12

30-Jun-12

30-Sep-12

31-Dec-12

31-Mar-13

Net Operating Cash Flow

$16.0

$9.9

$17.5

$13.8

$16.3

Capital Expenditures

-$6.0

-$6.7

-$102.0

-$96.0

$12.6

Net Investing Cash Flow

-$2.7

-$81.0

-$15.0

-$95.0

-$8.4

Cash Available For Financing Activities

$13.3

-$71.1

$2.5

-$81.2

$7.9

Cash Dividends Paid - Total

-$5.9

-$6.0

-$6.9

-$7.4

-$8.8

Stock Issuance(Reduction)

$0.0

$48.0

$8.3

$53.0

$51.0

Issuance/(Reduction) of Debt, Net

($21.0)

$5.0

$3.2

$25.0

($8.5)

Dividend Cover From Cash Available For Financing Activities

2.2

0

0.4

0

0.9

[Figures in $US million. Cash available for financing activities is the sum of operating cash flows after the removal of investing cash flows including CAPEX spending.]

On a cash flow basis, the company's payout looks precarious. Only in one out of the last five quarters has the company been able to cover its payouts from cash available. However, the worrying thing is that the company has been bolstering cash flow with large, consistent issuance of stock, which dilutes investor value. The company has increased the number of shares in issue by 10 million, or 15%

In addition, the company has been both issuing and paying down debt resulting in a net increase in debt of $3.7 million.

Without constant issuance of stock, CapLease would not be able to fund its dividend and the equity issuance is diluting shareholder value.

Macquarie Infrastructure Company LLC (MIC)

Share Price

EPS ttm

Dividend

Yield

Dividend Cover

$53.8

$0.30

$2.75

5.1%

0.1

At first glance, Macquarie is not able to cover its 5.1% dividend yield with earnings per share.

Cash Flow Statement

$US Millions

31-Mar-12

30-Jun-12

30-Sep-12

31-Dec-12

31-Mar-13

Net Operating Cash Flow

$23.7

$101.0

$39.8

$53.3

$33.7

Capital Expenditures

-$7.0

-$8.3

-$10.1

-$13.9

-$14.8

Net Investing Cash Flow

-$6.7

$31.5

$6.3

-$28.7

-$14.9

Cash Available For Financing Activities

$17.0

$132.5

$46.1

$24.6

$18.8

Cash Dividends Paid - Total

-$9.3

-$9.3

-$29.2

-$64.0

-$29.2

Issuance/(Reduction) of Debt, Net

3.3

($9.5)

($9.5)

($33)

($7.3)

Dividend Cover From Cash Available For Financing Activities

1.8

14

1.6

0.4

0.6

Free Cash Flow

$7.4

$83.0

$0.4

$25.3

$18.8

[Figures in $US million. Cash available for financing activities is the sum of operating cash flows after the removal of investing cash flows including CAPEX spending.]

Macquarie only started paying out a dividend to shareholders during 2011 after cutting the payout back in 2008. During 2011 and early 2012, the company paid out a quarterly 20c per share dividend, which it could easily afford, (Q1 2012 and Q2 in the table above). However, the company tripled its payout to 69c a share in the middle of 2012 and now it appears that the company cannot afford the commitment.

Dividend cover by cash available from financing activities has fallen from 14x in Q2 2012, to 0.6x in Q1 2013.

Additionally, while it may appear that the company is paying down debt, the debt reduction of $33 million only actually totals 3% of the company's total debt pile.

Overall, Macquarie's new larger payout does not look to be that safe.

Diebold Incorporated (DBD)

Share Price

EPS ttm

Dividend

Yield

Dividend Cover

$32

$1.24

$1.15

3.6%

1.1

Diebold Inc. has the longest and most consistent dividend payment history in the market. The company has been consistently paying and increasing its dividend every year for the last 59 but it appears that it can only just cover its payouts with earnings per share.

Cash Flow Statement

$US Millions

31-Mar-12

30-Jun-12

30-Sep-12

31-Dec-12

31-Mar-13

Net Operating Cash Flow

-$26.0

-$8.0

$5.2

$164.0

-$32.0

Capital Expenditures

-$12.0

-$13.0

-$10.0

-$14.0

-$9.3

Net Investing Cash Flow

-$19.0

-$1.8

-$37.0

-$15.0

$0.4

Cash Available For Financing Activities

$0.0

$0.0

-$31.8

$149.0

-$31.6

Cash Dividends Paid - Total

-$18.0

-$18.0

-$18.0

-$18.0

-$18.0

Issuance/(Reduction) of Debt, Net

$29.0

$34.0

$31.0

($70.0)

$30.0

Dividend Cover From Cash Available For Financing Activities

0

0

0

8.2

0

Free Cash Flow

-$56.0

-$35.0

-$28.0

$132.0

-$60.0

[Figures in $US million. Cash available for financing activities is the sum of operating cash flows after the removal of investing cash flows including CAPEX spending.]

The company's cash flows look pretty scary. Diebold has only had a positive operating cash flow in two out of the five quarters shown above, which does not give much confidence in the company's ability to sustain its payout.

Indeed, even though the payout is relatively small at $18 million a quarter, the company has still had to borrow to fill the funding gap.

Borrowing has driven Diebold from a net cash position of $46 million during Q1 2012, to a net debt position of $82 in Q1 2013 - still a sustainable net debt to equity level of 0.1x. Nonetheless the company is borrowing to fund the payout, an unsustainable strategy.

Conclusion

Overall after looking at the cash flows of these six companies I do not believe they can sustain their dividend payouts. I am not suggesting that they will be cut immediately but I feel that investors could find safer dividends elsewhere.

Source: These 6 Companies Cannot Support Their Dividends