With my continuing coverage of earnings releasers, I present some key newsmakers with both positive and negative sides. Ranging from telecommunications to technology, most of these firms have managed to survive the worst in the economic recession. Based on my analysis of recent earnings and news developments, I believe these six companies are unlikely to raise dividends this year.
Verizon (VZ) is the leading wireless services provider in the United States, next to AT&T (T), whose major shareholder is the UK-based Vodafone PLC (VOD). Verizon has been in the news lately on account of the announcement of the $10 billion dividend, which unfortunately will not be a recurring one. The stock for Verizon communications pays a dividend to its American shareholders, worth $2 per fiscal year, yielding a solid 5.2%. Verizon currently has a payout ratio of 231%.
There is talk lately of a dividend cut based on the belief that Verizon is moving to a growth oriented stock from a mixed value and growth oriented stock, due to its recent acquisitions of new technologies such as Coinstar (CSTR). With nearly $14 billion in cash and an operating cash flow of nearly $30 billion for the trailing twelve months, I believe that fears aside, there is no risk to Vodafone's dividend in the near term, although increases may be debatable.
Incidentally, I also cover the other big telecom giant AT&T in this report, which is making the news for its interest in Leap Wireless (LEAP), which now seems unlikely to go through. The stock offers a dividend of $1.76, with a yield of 5.8%, beating major rival Verizon. The current payout ratio is a whopping 261%. The stock currently trades at the $30 level with a price earnings multiple of over 45 times.
In my humble opinion, expectations of recovery from the extremely high valuation multiple are overly optimistic. However, the company continues to be fundamentally strong with solid iPhone sales and the T-Mobile acquisition loss that is probably a one-time charge. The market position of the company is strong, and the liquidity position is fair, with an interest coverage ratio well above the industry average. Overall, I don't expect a degradation of dividends yet, as fundamentals are still relatively strong.
Applied Materials (AMAT) is a technology company centered around nanomanufacturing of semiconductors, famous for its Precision 5000 etcher making its way into the Smithsonian Institution's Information Age Technology collection, among other things. The company reported solid first quarter earnings for 2012, up .5% sequentially, although on a year on year basis, earnings were down 18.5%. The stock pays a dividend of $0.32 a year, yielding 2.5%. Applied Materials currently has a payout ratio of 26%.
I'm relatively bearish on the stock for the short to mid term, despite several analysts claiming high long-term potential. I believe the upward earnings move is little to be pleased about, as only faster deliveries rather than an overall upswing was the cause. Furthermore, the display and solar segments didn't do any better and are unlikely to do so going forward. Finally, despite an upward guidance going into Q2, I believe the industry still faces significant headwinds and it is unlikely that any participant will gain substantially.
KeyCorp (KEY) is yet another bank in the Midwest, headquartered in Cleveland, OH. Banks haven't been investors' favorites lately, although KeyCorp presents an interesting option, having raised its dividend last fiscal in May to $0.12 per year, offering a yield of 1.5%, with a payout ratio of 11%. Per the latest quarterly report, earnings were down to 20 cents per share from 32 cents per share last year. The encouraging part however, appears to be the improvement in asset quality, with NPAs (non-performing assets) going down 16 basis points.
Looking ahead, KeyCorp appears to be in a good position to continue to improve earnings, based on restructuring efforts and improving asset quality. However, upside appears to be limited, and while dividends seem relatively secure in light of fundamentals, I'm recommending that any further increase be ruled out in the backdrop of rising BASEL III compliance costs.
Bristol-Myers Squibb (BMY) is not the only global pharmaceutical company in the world to face a patent cliff. However, it is indeed one of the few to have cooperative agreements with other pharma companies to develop drugs. Its cooperation with Sanofi (SNY) to develop an anti-coagulation drug Plavix, especially as the incumbent Warfarin seems to be falling by the wayside.
Bristol-Myers Squibb is trading at the top edge of the 52 week range, just above the $32 mark. For a pharma company, the stock offers a robust dividend yield of 4.2%, compared to an industry average of about half that value. The payout ratio is currently 61%. With a priority review for Eliquis, Bristol-Myers Squibb should be able to hold its head high among peers, although I'm not expecting the dividend payout to increase this year.
Seagate Technology (STX) is the $12 billion hard drive giant of the computing world that saw revenues jump over 13% for the most recent quarter and net earnings almost quadruple, likely in response to the flooding in Thailand that squeezed supplies and boosted prices for hard drive equipment. During the same period, the stock price has nearly doubled, gaining another over 100% since then in February, to trade around the $27 mark with a price earnings multiple of 13 times.
Seagate offers a dividend of $1 per fiscal year, at a yield of 3.7%, with a payout ratio of 26%. Although the latest quarterly report is quite positive, I'm not particularly bullish on the stock long term, by virtue of the onset (increasingly) of new-age solid state hard drives, that will continue to erode the market for conventional hard drives that are both slower and losing their competitive pricing. Looking at the short-term, I expect the Thailand flooding, which destroyed much of the equipment used to make hard drives, will cause enough of a challenge in terms of supply chain to prevent any dividend increases as cash flows may be restricted.