Dividend stocks have performed relatively well in the recent market correction Two factors are driving renewed investor interest into dividend paying stocks. One is the high volatility in the global stock markets, as dividend stocks have been more stable compared to many stocks that don't pay a dividend. The other reason is because the Federal Reserve plans to keep interest rates at very low levels (near zero) for about two more years.
With interest rates on money market and savings accounts so close to zero, many investors have been piling into dividend stocks that pay 3, 4 and even over 5% yields. However, it seems that some investors might be overlooking risks in some of these stocks. One of the biggest risks is a dividend cut which can result in a very sharp drop in both the stock price and the yield. Here are a few companies that could be at risk of a dividend cut either because they are not generating enough profit to pay the dividend, or because management might want to conserve cash:
Veolia Environnement (VE) is based in France and is a leading provider of water, recycling, environmental services, waste collection and processing etc., with operations worldwide. Veolia stock has been hit very hard over the crisis in Europe, and now offers a very rich yield of almost 11%. However, the dividend is at $1.47 per share and this is more than earnings are expected to be in 2011. Also, the European economy appears to be weakening and this could further reduce profits for Veolia.
Here are some key points for VE:
- Current share price: $13.67
- The 52 week range is $13.02 to $33.86
- Earnings estimates for 2011: $1.41 per share
- Earnings estimates for 2012: $1.47 per share
- Annual dividend: $1.47 per share which yields about 10.9%
Transocean (RIG) is a major offshore oil and gas drilling contractor that operates worldwide with a fleet of about 138 mobile offshore rigs that it either owns or operates. This company is still dealing with legal issues and liability from the BP oil spill, and the company recently reported much lower than expected profits. After earnings were released an article on Bloomberg detailed the dividend concerns by stating "Newman and Chief Financial Officer Ricardo Rosa declined during the call to say whether the company would pay a planned $1 billion dividend next year. The company’s board will begin discussions of the payout in a few weeks and will make a decision in February, Newman said."
Here are some key points for RIG:
- Current share price: $48.99
- The 52 week range is $43.15 to $85.98
- Earnings estimates for 2011: $3.34 per share
- Earnings estimates for 2012: $5.55 per share
- Annual dividend: $3.16 which yields 5.6%
Windstream Corporation (WIN) provides communications services (primarily to rural areas), such as local and long distance, Internet access, data services, and video services. This is also one of the top yielding stocks in the market and has recently dipped. The concern here is that the earnings estimates are currently well below the dividend payout. That along with the high yield, could be a warning sign that the company might need to cut the dividend.
Here are some key points for WIN:
- Current share price: $11.85
- The 52 week range is $10.76 to $14.40.
- Earnings estimates for 2011: 79 cents per share
- Earnings estimates for 2012: 85 cents per share
- Annual dividend: $1 per share which yields 8.2%
Frontier Communications (FTR) provides communications services, such as local and long distance, Internet access, data services, and video services. This stock is trading near a 52 week low, it has an excessively high yield for this sector and the earnings estimates are well below the dividend payout. All of this appears to indicate that some investors are expecting a dividend cut.
Here are some key points for FTR:
- Current share price: $5.66
- The 52 week range is $5.33 to $9.84
- Earnings estimates for 2011: 24 cents
- Earnings estimates for 2012: 29 cents
- Annual dividend: 75 cents per share which yields 13.2%
Nutrisystems, Inc. (NTRI) provides weight loss programs and food to men and women. Nutrisystems reported disappointing earnings early this year, and just reported another weaker than expected quarter which sent the stock to new 52 week lows. It appears that the weak economy and heavy competition is impacting the financial results at this company. With the dividend at 70 cents per share and earnings estimates for 2011 likely to be below that level, a dividend cut could be considered by management.
Here are some key points for NTRI:
- Current share price: $11.34
- The 52 week range is $10.46 to $22.64
- Earnings estimates for 2011: 66 cents per share
- Earnings estimates for 2012: $1.05 per share
- Annual dividend: 70 cents per share which yields 5.8%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.