We took a look at 9 dividend paying stocks to see if any were at risk of a dividend cut in the foreseeable future. Here's what we uncovered.
AvalonBay Communities (NYSE:AVB): AvalonBay is bouncing, but with a plan to invest around $700 million in new properties, the company will be expending a large amount of resources on a risk-fraught move. The economy is not out of the woods yet, but AvalonBay has just put a pretty big bet in place with what may turn out to be unwarranted optimism. Also, even relative to its peers, its earnings multiple is rich, around 85.
AVB has a 229% payout ratio relative to earnings, so unless it can get its earnings power up, there is a possibility that continued payments of the 2.75% dividend will come to a halt. AvalonBay is $4B in debt with around $250 million in cash on its books. Shares have risen steadily over the past 6 months from $18 per share last summer.
When inflation and interest rates rise, shares of REITs like AvalonBay could depreciate, creating a downward yield spiral and a hit to the REITs real bottom line. We see the spectre of inflation on the horizon, and recommend investors avoid most REITS; and instead, consider moving money into safer income plays. After all, AVB is hovering around its 52-week high. It might be a good time to take profits. For more of our opinion on select REITS, please read our opinion here.
General Electric (NYSE:GE): GE has a market cap of $204.09B and a P/E ratio of 18.10. The stock also offers a dividend of $0.50 (3.2%). GE is one of the most diversified companies around, with operations all over the world in many different fields, including finance, technology, energy and more. In 2010, this Buffett favorite made $150.21 billion in revenues, which was a drop of 4.19%, after dropping by 14.1% in 2009. GAAP/non-GAAP EPS crept up by 4.95% to $1.06, after dropping by 41.28% in 2009. Also, the EBT margin improved from 6.6% to 9.46%. In 2011, analysts expect EPS to be between $1.24 (+16.9%) and $1.38 (30.1%). Q1 2011 results come out on April 21. Analysts expect between $0.25 and $0.30. In comparison, the Q1 2010 EPS was $0.21. GE shares trade with a P/S multiple of 1.4.
In the earlier part of the 2000s, these shares traded 2.0 to 2.5 times sales per share. The company has a debt to equity ratio of 2.4 which, while manageable, may consume much of GE's cash flows over the next few years. We expect GE shares to continue to trade in the neighborhood of 1.5 times sales per share over the long haul, which means GE's share price could head higher. However, GE did cut its dividend during the financial crisis, and we think it could happen again. Growth initiatives are likely to consume considerable cash. GE may temper its dividend growth amid restructuring of its financial group. Our outlook on GE's dividend is negative.
We think industrials Actuant (NYSE:ATU) and Honeywell (NYSE:HON) represent much better bets than GE over the long run.
Annaly Capital Management (NYSE:NLY) This REIT currently yields 13.64%. The 52 week trading range is $14.90 - $18.54, and it now trades near $18.23. Annaly owns and manages a portfolio of mortgage-backed securities. We suggest this specifically for income investors because we do not expect much capital appreciation nor do we expect much on the downside. But like AvalonBay, shares have been strong as of late. Should we see rates rise this year, Annaly's profit's could fall which would depress Annaly's yield.
We think higher inflation over the intermediate term does not bode well for Annaly. While prolonged joblessness will dampen inflationary pressures, we do not think the full effects of QE2 have percolated through the economy just yet.
Disclosure: I am long ATU.