Today I ran a quick screen to spot which mid to large caps are going to pay fat dividends to their shareholders in the next quarters, but whose financial statements indicate that such a large dividend is probably not sustainable for a long time. Dividend investors are often tempted to buy into high yield companies, but acting on greed can cost you dear because a high yield on most occasions raises a red flag. If the dividend is not sustainable, not only your quarterly check will get an haircut but the stock price will follow suit as well.
If you hold shares in any of these companies, it would be a sensible decision to keep an eye on the firm's balance sheet and income statement in the next quarters and reassess your decision to keep it in your portfolio.
Ship Finance International (SFL) - A shipping company based in Hamilton, Bermuda. The current dividend yield is 9.2%; earnings per share are $1.60 and the dividend is $1.20 so a payout ratio sitting at 75% looks a little uncomfortable; net income has been declining in the past years, it now stands at $120 Mil and with an oustanding debt north of $2 Bil the picture does not look so rosy.
Telefonica (TEF) - The Spanish telecom giant has recently reported good financial results for 2011. However earnings per shares have declined from the prior year due to higher operating costs and a tough economic environment in Europe. Debt is also a whopping $80 billion and although the company has already announced a dividend cut in November, if earnings don't improve in the next quarters, the current payout - around 90% - will appear unsustainable and further cuts will be necessary. The current yield is 13%.
Radioshack (RSH) - The electronics franchise store chain is suffering from lower profit margins and increased competition from phone companies. Q4 profit fell 79% year over year and there are no clear signs the company will be able to regain market share, so one has to question its ability to maintain its 75% earnings payout. The debt to equity ratio is an uneasy 90%, the dividend yield is 7%.
France Telecom (FTE) - Just like Telefonica, the french telecom is suffering from a decrease in revenue in its home market, which accounts for 50% of the total. The company has an expanding business in Africa but it is still to little in terms of sales to really make a difference. The dividend yield is an intriguing 13% but cash flow and earnings have been on a descending slope, so a 95% payout can't be sustained much longer.
Pitney Bowes (PBI) - This company is in the mailing business since the 1920s but just like Eastman Kodak it is tied to a dying industry and could suffer a similar fate if it doesn't adapt. Operating income has been slowly declining in the past years while management has been increasing the dividend regularly. While the current 8% yield is indeed attractive and probably will be maintained in the next quarters, a history of declining sales is not encouraging and I'd rather pass on this one.