By Chris Seabury
A common strategy that most investors use in choppy markets is to buy dividend paying stocks. This is because these businesses are more established, which will help to increase the stability of the portfolio. In 2011, this was the case as companies that were paying dividends outperformed their non-dividend paying counterparts by 17% (according to a study that was conducted by Alliance Bernstein). This is important, because it is showing how these companies will offer greater stability and growth. However, a common trap that most investors fall into is purchasing companies based solely on the dividend yield. This is problematic due to the fact that many companies could have paid a large one-time special dividend to shareholders (which would cause the yield to show more than it really is) or are paying a dividend in excess of available cash flows. To determine if Exelon (NYSE:EXC), Banco Santander (STD), Armour Residential (NYSE:ARR), Mobile Tele Systems (NYSE:MBT) and Avon Products (NYSE:AVP) fit into this category requires carefully examination of the dividend for each.
Exelon is yielding 5.10%. The payout ratio is .488 and the company has $1.07 billion in cash. The profitability includes profit margins of 12.2% and operating margins of 23.03%. These figures are showing how the company can continue with the current dividends. This is because the company is paying less than half of the earnings in dividends. While the 12.2% profit margins and 23.03% operating margins are a sign that the company has enough growth to maintain these levels. Moreover, the company has over 6 million customers and is involved in the production of electricity through a number of sources. These include renewable, hydro, nuclear and coal powered plants. As a result the company will more than likely maintain if not increase the dividend in the future because of demand for these products.
Banco Santander is paying a yield of 8.60%. The payout ratio is .544 and the cash on hand is $352.41 million. The profitability includes profit margins of 21.98% and operating margins of 34.03%. These numbers are illustrating how the dividend payout rate will remain the same or increase. This is because the company is paying a little over half of the earnings in dividends and the company has lots of cash on the balance sheet. The growth rate is higher than the industry average which is -1.17%. Furthermore, the company has been aggressively expanding into other markets around North America, South America and Europe. While at the same time the company is offering more products and services to customers. This is illustrating how the dividend rate will remain consistent and possibly increase in the future.
Armour Residential is yielding 18.50%. The payout ratio is 1.29 and there is a total of $250.49 million in cash. The profitability includes profit margins of -111.19% and operating margins of 136.47%. These figures are indicating that the dividend is unsustainable. This is because the company is paying out more in dividends in comparison with the corporation’s earnings. Moreover, the company is experiencing declines in its profit margins (which are indicating that the company is losing money). At the same time demand for subprime mortgages has begun to increase because of the low interest rate environment. The problem is that the company is not able to capitalize off of this. As a result the dividends will more than likely be reduced or suspended in the future.
Mobile Telesystems is yielding 6.70%. The payout ratio is .855 and the cash on hand is $1.58 billion. The profitability includes profit margins of 9.79% and operating margins of 22.19%. These dividend rates are sustainable. The reason is because the company has consistent rates of growth in operating margins. This is an indication that the company is seeing increasing sales. Furthermore, the company is expanding away from providing wireless services in Russia and the former Soviet republics into cable television. In the future this means that the divided rate will remain consistent as these other segments are starting to add to the overall bottom line numbers of the organization.
Avon Products is yielding 5.20%. The payout ratio is .928 and the total amounts of cash on hand are $1.01 billion. The profitability includes profit margins of 6.51% and operating margins of 11.26%. These dividends rates are sustainable due to the fact that the company has been seeing increasing demand in Latin America and Eastern Europe. In the future this will help to improve earnings. As a result the current dividend rates will more than likely remain consistent or increase.
Clearly, there are many companies that have the potential of maintaining or raising the total amount of dividends, because these companies are seeing some kind of catalyst that will help to ensure strong levels of growth in the future. The most notable include Exelon, Banco Santander, Mobile Telesystems and Avon Products. This is important, as there is some kind of catalyst that will help these companies to be able to increase their earnings per share (which will translate into consistent or rising dividends). In the future, these stocks will provide stability and growth to investors’ portfolios. Armour Residential will more than likely see its dividend reduced. This corporation is paying more than the actual earnings to shareholders. Additionally, the company is losing money with negative profit margins. This is an indication that despite increasing sales, there are considerable financial challenges facing the organization in the future. Once this occurs there is the probability that volatility could increase in the stock after dividend rates are reduced or eliminated. As a result investors should be cautious when looking at the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.