Dividend paying stocks have gained a lot of attention since the economic crisis due to their ability to pay out, hard, solid cash when other stocks were losing value drastically. However, as returns on a dividend paying are slow to accumulate, it is important to analyze the ability of the company to sustain its dividends in future years as well. Some major factors which need to be taken into account include the company's dividend yield and its historical growth. Also, payout ratio explains how much a company is giving out in dividends as a proportion of its profits. Other than that, analysis of other business factors can help in determining the sustainability of the company's dividends. In this article, I am going to look at five stocks. Please use my research as a starting point for your own due diligence.
American Capital Agency (AGNC), currently, has a staggering dividend yield of 19.54%. The payout ratio is 78.00%. The highlights of the profitability ratios include a decent gross margin of 100%, while the Net Profit margin is also handsome, at 81.66%. Both figures are convincingly better than the industry average of 34.34% and 18.27%, respectively. Meanwhile, the current ratio is only 0.11. The high payout ratio of the company can be attributed to its REIT status. The company is engaged in residential mortgage pass-through securities and collateralized mortgage obligations. The company's investments are guaranteed by the U.S. government or one of its agencies which provides more investment security to American Capital, as compared to other REIT companies. Dividend growth has also been impressive in the last 3 years, at a rate of 25%. Also, the market capitalization of $6.48 billion strengthens the position of the company for dividend payment. As interest rates do not significantly affect the company and since its financial indicators are quite stable, there is hardly any reason to expect any downfall in dividends.
PDL BioPharma (PDLI) is yielding 9.5%. The company has payout ratio of 58% which is slightly towards the higher end. However, this still casts no serious doubt on the company's ability to keep up with its dividends in the coming years. The interest coverage ratio stands at 6.7. The company is clearly under no stress over paying out its interest payment. The business model of the company is based on generating royalties through licensing agreements. The current "queen" patents will expire in 2014, after which the company needs to come up with new patents to continue its growth. However, currently there is no significant research and development being conducted which could ensure replacement of its existing patents. Jurisdiction based protection for antibodies covered by Raptiva, Herceptin, and Synagis patents are expected to expire in March 2013, July 2014 and August 2014, respectively. The company could see a mild hit at each expiration due to the uncertainty introduced by each expiration. A beta of 0.38 shows the company's stock is not highly correlated with the market. The stock has traded in a narrow range during the last 52-weeks; $4.66-$6.70 per share. Currently, the company's financial indicators are all positive; however, its inability to successfully manufacture any new drug since its inception in 2007, casts serious doubts over its future earnings. The company has a fantastic royalty-based business model, however further due diligence is needed to uncover the company's share price catalysts after 2014.
MFA Financial (MFA) is yielding 14.3%. The payout ratio is 102%. This figure is alarming in the sense that any payout ratio exceeding 100% is highly difficult to sustain. This makes sense, despite the fact that companies, such as MFA Financial, Inc, which operates as REIT are bound by law to distribute 90% of their income as dividend in order to earn tax breaks. Nonetheless, in the last 5 years, the dividend growth, on average, has been 33% which is a significantly encouraging historical trend. The effect of interest rate on MFA Financial could be significant as its mortgage-backed securities are secured by numerous types of mortgages including some which have frequent fluctuating interest rates. Profit margins are reasonable, with the gross margin and net profit margin at 68.94% and 65.36%, respectively. Cash flows are seemingly fine, with an operating cash flow of $304 million. Lastly, a market capitalization of $2.48 billion, which is among the top 15 in the industry, is indicative of the fact that dividends are stable and continuous in coming years. Hence, except for the exceptionally high payout ratio, rest of the financial indicators point towards positive trends in dividends in future.
France Telecom (FTE) is yielding 12.99%. Payout ratio is 61 % which is quite modest, apart from being manageable in coming years. The company has gross and net margins of 56.77% and 6.68% respectively. Both these figures are almost the same as the industry averages. Moreover, its interest coverage ratio of 3.6 is a point of concern, as it raises doubts regarding the company's ability to pay its interest payments. Debt to equity ratio is 1.12 which is noticeably lower than the industry average of 1.6. Operating cash flow is in abundance, as it stands at $ 17.5 billion. However, in the last 5 years, dividend growth has been negative, a fact which sends out unfavorable signals. The telecommunication sector has become highly competitive in Europe, in the past few years, with the inclusion of new operators. The future of France Telecom depends on its ability to fight in the growing competitive market. The overall market recession in Europe might also lead to negative impact on the company. Also, a proposed European Union amendment would result in squeezed profits for the telecommunication sector as it addresses net neutrality, thus, hampering their ability to maintain their current dividend rates.
CenturyLink (CTL) is yielding 7.6%. It has an extremely high payout ratio of 158% which cannot be deemed healthy by any measure. Such a massive payout ratio puts serious questions over company's ability to continue with similar dividends in future. It also shows that the company is probably not reinvesting any profits to achieve further growth. The company's debt to equity ratio is 1.01 which is in line with industry average but the interest coverage ratio is very low, at only 2.3. The dividend has stayed fairly constant in the last four years which cannot be interpreted as a reassuring factor. In the past, this company has been attributed with some profitable acquisitions, for example with Qwest, which were the main driving force behind its growth. Its future now depends on its ability to keep up the pace of its acquisitions; inability to do so may lead to a major downfall in its expected dividends.