Buyer Beware: 3 Stock Dividends That Could Be at Risk

by: NakedValue

Theoretically, dividends don't matter. But in real life, investors pay attention. Not only do dividends discipline management by reducing the excess capital available for acquisitions, they also provide a tangible signaling effect to the markets regarding the company's fiscal strength and future prospects.

These seven stocks have attractive dividend yields based on trailing dividends, but the information could be deceptive.

Nokia Corporation (NYSE:NOK)
Dividend: $0.46 / 5.10%

Nokia is an unlikely company for this list. They are the world's largest manufacturer of cell phones and remain one of the technology industry's most famous companies. Nokia successfully steered through the financial crisis, remaining profitable despite falling revenues and margins. In addition, management is so proud of their commitment to returning shareholder capital that they post the company's dividend history on the website. While the dividend amount was reduced in 2008, and has fluctuated at times based on market conditions, the trend since 1989 has been impressively positive.

While the dividend reduction in 2008 from 0.53 EUR to 0.40 EUR was reasonable considering the macro economic environment, the reduction in implied dividend paying capacity was greater than it appeared. The dividend reduction saved 511 million EUR, but the share buyback program experienced a greater cutback. From 2006 to 2008, Nokia repurchased an average of 3.473 billion EUR of their shares each year. In 2009 and 2010, they have not purchased any shares even though the stock has fallen from a high of around $40 in 2007 to the current price of $9. This suggests that any further shocks or stresses to the company could lead to a far more severe reduction in the dividend.

While we are not predicting an imminent dividend reduction, we think investors should be cautious, especially if the stock's dividend yield is a main factor for their interest. There are reasons to be bullish of Nokia. The Microsoft partnership that we discuss here is a potential game changer, but the probability of success is unclear. In addition, valuation provides some margin of safety.

SuperValu Inc (NYSE:SVU)
Dividend: $0.35 / 3.70%

The company owns a strong portfolio of supermarket chains that include Jewel-Osco, Save-A-Lot, Shaw's and Albertson's. But the stock price has suffered because of pressures from debt burdens assumed during pre-financial crisis acquisitions as well as the shrinking margins caused by rising food prices.

This company could turn out to be a leverage investment for contrarian investors who believe the end of QE2 will relieve food inflation pressures. However, investors should be rightfully cautious of the dividend. With annual interest expenses of nearly $600 million, it is very possible that the company will continue to reduce the dividend.

Whirlpool Corporation (NYSE:WHR)
Dividend: $1.72 / 2.10%

While dividend reductions are often associated with weakness, in this case, we think a dividend reduction could be a creative sign of strength. The stock has been punished by several factors including an under funded pension, rising input costs, fears about the consumer, weakness in the housing market and overall malaise about the global appliance market.

With a forward P/E of 8.60, a PEG ratio of 0.54 and EV/EBITDA of 4.71, the cheap valuations may make this household name a good value. In addition, the company's growing global reach will likely provide further opportunities as middle classes emerge in developing markets.

To be clear, what we're suggesting is a low probability event. Having paid the same dividend since 2006, if there is a change, we're more likely to see a dividend increase than a decrease, but to enterprising management, it may be a great time to reduce the dividend completely and reallocate those cash flows towards a large scale share buyback program.

Other Possible Dividends at Risk

Southern Copper Corporation (NYSE:SCCO)
Dividend: $2.32 / 5.80%

Hudson City Bancorp (NASDAQ:HCBK)
Dividend: $0.60 / 6.10%

Questar Corporation (NYSE:STR)
Dividend: $0.61 / 3.50%

World Wrestling Entertainment (NYSE:WWE)
Dividend: $1.44 / 11.50%

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK, WHR over the next 72 hours.