Dividend stocks live and die by their ability to keep their dividend payments flowing and increasing. Companies that strain to pay their dividend can quickly run into problems. I analyzed a group of six stocks with some precarious situations to see how vulnerable the dividends of each of these stocks and explore how likely each could get cut in 2012.
One of the key elements to look at is the payout ratio: how much of a company's earnings are being paid out in dividends. For most companies, a payout ratio above 80 throws up warnings - it may be robbing operational capital to keep the dividend paid. Some companies, like REITs, are set up differently and have to pay at least 90% of earnings in dividends but can go higher, even over 100% for a short period of time.
The REIT Annaly Capital Management (NYSE:NLY) is first for our group and it has a mouth-watering dividend of $2.28 on an annualized basis which equates to a current yield of 13.89%. It has a recent price of $16.41 inside a narrow 52-week trading range of $14.05-$18.79 $15 billion dollar market cap earnings per share $1.89 price earnings ratio of 8.62. However it has a terrifyingly high price to earnings growth ratio of 3.587 while that key barometer of payout ratio is 147.3. Worse, the payout ratio has been over 100% for two years. Such a situation financially cannot continue, so unless management can suddenly pull the rabbit of new earnings out of a hat, the dividend will have to be cut--again.
Another mortgage REIT is Chimera Investment Corporation (NYSE:CIM) sports the highest dividend yield of this group at a juicy 15.77% off an annualized dividend of $0.44. The $2.78 recent share price, 52-week trading range of $2.38-$4.34 market cap it has an earnings per share of $0.50 for a miniscule price to earnings ratio of 5.57. So far so good, but that pesky payout ratio of 110.7 has klaxons sounding. Also Chimera's investment strategy is much more risky than is Annaly's, relying more on non-guaranteed real estate and European investments. It is not nearly as bad a situation as Annaly. In fact for risk takers this stock could offer some astonishing returns if things break well, but it still should be watched with a jaundiced eye.
Garmin Ltd (NASDAQ:GRMN) has much poorer dividend results. It currently offers an annualized dividend of $1.20 for a yield of 3.92% - good but not sterling. It has a market cap of $7 billion, with a recent share price of about $41.08, which is almost topped out to its 52-week trading range of $29.23-$41.50. It boasts an earnings per share of $2.50 for a price to earnings ratio of 16.43. It has a price to earnings growth at a mildly worrisome 2.089. The market has run up the share price since it hit its low on 4 October 2011, but bears love this stock and have shorted a full 8% of all outstanding shares. Here the payout ratio is an extremely reasonable 79.5. So where is the dividend worry? The problem is earnings and market share are falling as multi-functioning smartphones degrade the usefulness GPS-based devices Garmin depends on. For now Garmin is safe, but if earnings continue to slide then managers will need to make some tough decisions about how to respond to the massive wave of competition, and the dividend may become endangered to cuts later in 2012 to either ease cash flow or to help fund new directions such as product development..
A much higher current dividend goes with Nokia Corporation (NYSE:NOK) which now offers an annualized dividend of $0.55 and a yield of 9.67%. It has a recent price of about $5.63 and a market cap of $3 billion and a 52-week trading range of $4.46-$11.75. Earnings per share stand at $0.20 for a price to earnings ratio 28.15, uncomfortably high for a dividend stock , although its price to earnings growth ratio is a comfortable 0.607. This is another case of falling earnings and the payout ratio stands at a repugnant 227.1. Nokia has been facing criticism that their products lag its competitors in innovation. As if we didn't need another bearish indicator, a shocking 24% of all outstanding shares are shorted meaning the market judged Nokia's slide will continue. There will be lots of pressure on the board to cut the dividend, sooner rather than later.
Century Link, Inc (NYSE:CTL) is the biggest stock by market size of this group with a market cap of $23 billion. It has a stock price of around $37.44 which is mid range of its 52-week band of $31.16-$45.34. Century's annualized dividend is $2.90 which comes to a yield of 7.85%. It has the second highest price to earnings ratio of this group at 20.46 off of earnings of $1.83 per share. It also has a payout ratio of 223.2, deadly high and second only to Nokia's awful numbers. Worse, Century Link had a reputation of regularly raising its dividend, until 2011. Here the issue is Century Link's purchase of Qwest. The company is struggling in integrating the two organizations and overcome the falling performance of the Qwest infrustructure while dealing with a negative cash flow of $100 million per quarter since the acquisition. The board may very well have to temporarily cut the dividend to conserve precious cash.
The final company is Windstream Corp (NASDAQ:WIN) which has a yield of 8.22% and a recent price of about $12.35 within a 52-week trading range of $10.76-$13.57. It has a price earnings ratio of 24.0 off of earnings per share of $0.51. It has another of those ghastly payout ratios of 192%. Another flag is it is carrying an intangible book value of $128.4 million in goodwill, or a tangible book percent of over 22% when 20% is considered high. The whole financial structure looks suspiciously weak and cut dividends could be the first sign that this company is going south.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.