This monthly series collects and summarizes SA members’ opinions about companies with dividends that may be in danger. Not all information for each company has been independently verified. Readers’ comments have been integrated and edited. If you wish to see the full comment stream, consult last month’s article.
Always perform your own due diligence before making any investment decisions.
Hudson City Bancorp (HCBK), which was identified as having a dividend in danger in both the March and April articles, did cut its dividend on April 20. The dividend, which had been frozen since May 2009 at $0.15/share/quarter, was chopped to $0.08 for the upcoming May, 2011 payment, a 47% decrease. The stock’s price had taken a significant tumble in early March, falling from about $11.50 to under $10, and it has been floating slowly down since then to a current level of about $9.26.
Even with its dividend cut, HCBK still has a projected yield of nearly 3.5%, but of course its former 12-year streak of increasing dividends is over. According to the press release, "While (the board of directors) recognize(s) that (the new dividend) is lower than our recent dividend levels, it represents a dividend yield of 3.30% as compared to an average dividend yield of 1.24% for all financial institutions in the S&P 500 as of April 13, 2011. We believe that paying a dividend yield that is competitive with comparable companies in the marketplace is important and is a primary focus for us. We are committed to shareholder value and believe that the current dividend level represents a prudent capital management decision."
(For more on stocks that have frozen their dividends, see the section near the end of this article, “Frozen Dividends.”)
Sysco (SYY) was extensively discussed in the first two articles in this series, and it has drawn lots of comments. The consensus on Sysco seems to be that its dividend is not in great danger, but that it bears watching because of the effects of rising food costs.
Sysco’s F3Q report on May 9 put some minds at ease, as the company beat consensus estimates, and its price surged over 10% on the day of the announcement. The company achieved its results with higher prices and volume, but it also reported that costs had risen amid higher food and fuel expenses. Sysco derives most of its sales from the restaurant industry, and higher costs are squeezing many food-related companies.
Sysco is on a 41-year streak of increasing its dividend, with its last increase in January of 4%, so it is nowhere near being overdue for an increase. Its next dividend payment would normally be made in July, and if it follows its practice of recent years, that dividend declaration will be made shortly.
Reader comments since the company’s earnings announcement focused as much on the psychological benefits of selling a company whose dividend worries you as on Sysco’s dividend itself.
- Is it really a mistake to have sold if the decision provides peace of mind? If you want to call selling a mistake, it was an opportunity-lost mistake, which is incredibly better than a lost-money mistake.
- One quarter's results and one day's price change do not make selling SYY either a mistake or a success. Dividend-growth investing is long-term oriented. If you gained peace of mind, it was not a mistake at all.
- The thesis for the dividend risk is still intact. Wall Street expected nothing from SYY and got a little instead. They barely budged their net profit upward despite a 9% increase in revenue. Higher food and fuel costs compressed margins, which is at the heart of what makes people think the dividend is potentially at risk.
- What we did learn is that SYY was able to raise prices quicker then they told us and more then they thought they could. Price increases essentially completely offset the increased fuel and food costs.
Frontier (FTR) was in the “Quickies” section last month, but I have elevated it mainly because of an SA article, “Frontier Communications: High Yield Dividend Still Safe.” The article by David Klein published on May 10 discussed Frontier’s 2010 deal with Verizon (VZ) for about 4.8 million access lines, which tripled the size of the company. We had previously noted here that the CEO had said the current dividend is sustainable. The company’s announced plan is to hold the dividend steady for the next two years while they fully integrate the acquired wirelines, and then begin raising the dividend again. Mr. Klein’s article concluded, “Integration appears to be on track to meet 2011 expectations and no problems have appeared, to date, in relation to pension funding that would have an adverse effect on the dividend.”
Frontier’s price took a big tumble in February, bottomed out in March, and has been slowly recovering since then. It cut its dividend by 25% with last September’s payment, and its current yield is about 8.7%. Normally, its next dividend would be paid in June and announced right about now.
And a Few Quickies
The following stocks received no further comments last month, and they will be dropped from next month’s article if they draw no further discussion.
- Old Republic (ORI). Reasons for concern included negative cash from operations, declines in receivables, increases in payables, and Yahoo’s (YHOO) reporting of the payout ratio at 531%. ORI has a 30-year increase streak going, although its most recent increase was just $0.0025/share/quarter (1.5%) in March.
- SuperValu (SVU). This company cut its dividend in half in 2010 and has held the payment steady since then. Its price has drifted downward from $17.13 in early 2010 to about $10.85 currently, and it yields about 3.2% at the current price.
- Pitney-Bowes (PBI). Pitney-Bowes is a 29-year dividend raiser, but its last increase in February was just $0.0050/share/quarter, or about 1.4%. Most commentary about it had been negative, with one reader pointing out that the company’s payout ratio exceeded 100% in 2010, although it was only about 40% of free cash flow. There is considerable debate about whether PBI’s business model is sustainable, since the physical mail is in decline, mailed packages compete with FedEx (FDX) and UPS (UPS), and PBI's attempt to introduce a software integrated mail solution puts them up against technology giants as well as ISPs. See also the comments about PBI in the article “High Yield Traps: 4 High Dividend Stocks at Risk of Reduced Yields,” cited in the section “Other Articles of Interest” below.
- Chimera Investment (CIM). This young specialty finance company, operating as a real estate investment trust (REIT), invests in residential mortgage-backed securities, residential mortgage loans, real estate-related securities, and various other asset classes. The company is externally managed by a subsidiary of the well-known dividend company Annaly Capital Management (NLY). Its dividend history has been erratic, with several cuts and increases in the past few years.
- Meridian Bioscience (VIVO). This company is said to have exceeded a 100% payout ratio. EPS estimates for this year and next are discouraging at $0.78 and $0.93/share, respectively. The $0.78 barely exceeds the current annual dividend. VIVO’s most recent dividend increase came in February, 2010, more than a year ago. Its most recent dividend, paid last week, stayed at $0.19/share/quarter for the 6th consecutive quarter. The company’s announced policy is to set a payout ratio of between 75% and 85% of each fiscal year’s expected net earnings.
One company, Black Rock Kelso (BKCC), a Business Development Company (BDC) that had cut its dividend in 2009, received one mention as having cut it again for its upcoming July payment. Even with the most recent cut, its projected yield is almost 11%. Its price crashed in March from $12.75 to $9.48, and it has basically flatlined there since then.
Each month, David Fish presents an article on frozen dividends, that is companies that are more than a year removed from their last dividend increase. David’s monthly update process on his “CCC” document (Champions, Challengers, and Contenders) allows him to identify companies whose expected dividend increases are coming up as well as others whose dividend increases are overdue. His most recent installment, “25 'Overdue' Dividend Increases: Are Cuts on the Horizon?” has some familiar names on it, including United Bancshares (UBSI), CenturyLink (CTL), Harleysville Savings (OTC:HARL) and others. As we saw above with Hudson City, a dividend freeze by a company that has steadily been increasing its dividends can be a precursor to an actual cut. Check out David’s article for more information.
Other Articles of Interest
Other Articles of Interest
I noticed these articles in the last month that are pertinent to the topic of dividend cuts.
- “Avoiding Dividend Cuts: Insights From the Number Crunchers” - The author is frequent commenter Low Sweat Investing. Mr. Sweat’s article was published on April 26. It discusses two studies, one by Schwab and the other by researchers at Brandeis University, that investigated indicators of future dividend cuts.
- “High Yield Traps: 4 High Dividend Stocks at Risk of Reduced Yields” - The author is Nicholas Pardini. The article, published on May 10, discusses Blue Square Israel (BSI), McClatchy (MNI), Horizon Lines (HRZ), and Pitney Bowes.
About This Series
The goal of this series is to provide a place where SA readers can trade ideas and pool their knowledge about dividends that may be in peril. The first two articles have been widely viewed (more than 34,000 views) and commented (more than 280 comments). Thanks for your continued interest, and please nominate companies that you think might have dividends in danger.
Please use the Comments section to discuss the companies mentioned in this article or to nominate other companies for the Dividends in Danger series. If you feel that an entire industry is in danger, please explain why and give examples of companies in the industry that are at risk. The best comments are focused, factual, specific and reasoned.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.