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Summary

  • Legacy Reserves and Southcross Energy are both high-yielding stocks with current yields just under 10%.
  • Both companies have seen increases in revenue, but have been unable to translate those increases into realized returns.
  • Both companies have seen negative earnings, as well as significant long-term stock price decreases.

Overview

Last week, I wrote an article that described two high-yielding dividend stocks that I considered worthy of consideration for long-term investors looking to add to their portfolio. I looked at a variety of factors, including current financials of the company, current price and valuation, earnings, and dividend history. Looking at the same factors, this article is going to discuss two high-yielding dividend stocks that I think investors should currently avoid. The two stocks I will be looking at are Legacy Reserves (NASDAQ:LGCY) and Southcross Energy (NYSE:SXE).

Legacy Reserves

Legacy Reserves is an oil and natural gas limited partnership that deals with the acquisition and development of oil and natural gas properties throughout various areas of the United States. The company was founded in 2005, and is headquartered in Midland, Texas.

Financials

Gross Profit Margin (Quarterly)65.22%
Profit Margin (Quarterly)-38.43%
Return on Assets (TTM)-2.07%
Return on Equity-5.82%
Revenue$485.5M
Quarterly Revenue Growth (YOY)34.92%

Looking at the chart below, you can see that Legacy Reserves has been able to see a fairly steady increase in both revenue and gross profit over the past five years.

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LGCY Revenue (TTM) data by YCharts

But when looking at this in relation to returns, it becomes clear that Legacy Reserves has had issues in efficiently using its assets and higher revenues to impact higher overall profitability (which is why it can has shown a 65.22% gross profit margin and a negative 38.43% profit margin.)

(click to enlarge)

LGCY Return on Assets (TTM) data by YCharts

Current Price and Valuation

Legacy Reserves closed Thursday at $25.23, compared to its 52-week high of $29.49 and its 52-week low of $24.62. The stock is trading below both its 50-day moving average of $26.41 and its 200-day moving average of $27.20.

Legacy Reserves has a PS ratio of 2.97x and a price-to-book value of 2.83x. It has seen the following price returns:

1-Month Price Return-4.87%
1-Year Price Return-5.83%
3-Year Price Return-19.04%

Earnings

For its latest quarter, Legacy Reserves reported earnings per share of $0.19, which was significantly lower than the $0.32 estimate and the $0.32 value of the same period last year. Legacy reserves has missed on estimates in 6 of its last nine quarters and, as you can tell from the chart below, continues to see difficulty in maintaining any positive growth in earnings.

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LGCY EPS Basic (TTM) data by YCharts

Dividend History

Legacy Reserves has a fairly impressive dividend history. It has maintained a high yield, and continues to grow its dividend, having done so now for 13 consecutive quarters.

Southcross Energy

Southcross Energy Partners is a midstream natural gas company that is involved in natural gas gathering, processing, treating, compression, and transportation services for its customers. Southcross Energy was founded in 2009, and is headquartered in Dallas, Texas.

Financials

Gross Profit Margin (Quarterly)16.09%
Profit Margin (Quarterly)0.15%
Return on Assets-2.79%
Return on Equity-5.94%
Revenue$634.7M
Quarterly Revenue Growth (YOY)15.48%

Looking at the chart below, you can see that Southcross Energy Partners has been able to see a fairly steady increase in both revenue and gross profit over the past few months.

(click to enlarge)

SXE Revenue (TTM) data by YCharts

In a very similar pattern to Legacy Reserves, Southcross Energy has been unable to translate its higher revenue into higher returns on assets or equity.

(click to enlarge)

SXE Return on Assets (TTM) data by YCharts

Current Price and Valuation

Southcross Energy closed Thursday at $17.09, compared to its 52-week high of $25.20 and its 52-week low of $14.92. The stock is trading below both its 50-day moving average of $17.46 and its 200-day moving average of $18.25.

Southcross Energy has a PS ratio of 0.34x and a price-to-book value of 2.09x. It has seen the following price returns:

1-Month Price Return-4.42%
1-Year Price Return-33.18%
Total Price Return-23.58%

Earnings

For Q4, Southcross Energy reported earnings per share of $0.01. For the entire year, the company reported an earnings loss of $16 million, compared to a loss of $4 million the year before.

Dividend History

Since SXE is a fairly new stock, its dividend history is quite short. It paid a $0.24 quarterly dividend back in February of 2013, and it has paid quarterly dividends of $0.40 since then.

Conclusion

There doesn't seem to be a lot of positive news regarding Legacy Reserves' near future. The company was downgraded last month by Wunderlich research firm, and just the other day, JPMorgan downgraded the company to Underweight from Neutral. Looking at Legacy Reserves' 2013 annual results, I can't disagree. While production increased 33% to an annual record, production costs increased by 38%. The company closed 16 acquisitions in 2013, which was well short of the company's goal, and the guidance the company set forth for 2014 wasn't very impressive. The dividend appears safe, which is the only reason, in my opinion, to buy this stock, but with similar stocks available with comparable yields that have more potential to see price appreciation, I recommend avoiding this stock until it can turn around its inability to create positive earnings.

I believe that Southcross Energy is in a similar position to Legacy Reserves. I think both will continue to pay high-yielding dividends, but I doubt there will be much price appreciation from either stock. Just as it did with Legacy Reserves, JPMorgan downgraded Southcross Energy earlier this month. If you want these stocks purely for the dividend income, you could do worse, but there are plenty of high-yielding stocks out there with greater potential for stock appreciation, in my opinion. I think long-term investors would be best served looking at those and steering clear of these two companies until they see positive earnings growth. As always, I recommend individual investors perform their own research before making any investment decisions.

Source: Legacy Reserves And Southcross Energy: 2 High-Yielders To Avoid