The global markets have been reeling under the pressure from heavy stock selling in recent weeks. In that environment, traders have had plenty of options to earn money while shorting stocks in a down market. For some time, it seems that many short sellers have been especially pessimistic about the prospects of several dividend-paying companies. Otherwise, in some cases, hedge funds may have been hedging some of their long exposures in the sector or engaging in merger arbitrage. The list of heavily shorted dividend-paying stocks includes the likes of Supervalu (SVU), Meredith Corporation (MDP), Kinder Morgan (KMI), Pitney Bowes (PBI), and Safeway (SWY).
Some of these companies boast very high yields, such as Pitney Bowes, with a 10.9% yield, and Supervalu, yielding 7.5% at current prices. Surprisingly, in spite of a negative sentiment, some of the noted short plays have registered large dividend hikes, such as Safeway, which recently upped its quarterly dividend by 21%. Still, the selling pressure has been quite strong so as to push down the shares of these companies by about 17.6%, on average, since the beginning of the year. The broad market, as measured by the S&P 500, was up 3.2% over the same period.
When analyzing the shorted stocks, the attention was paid to short interest as percentage of the float, the latter representing the total number of shares available for trading. As the chart below shows, among the aforementioned stocks, the shares of grocer Supervalu registered the highest short interest as percentage of the float, standing at 44.7%. According to some analysts, the stock has seen high short interest due to excessive debt-to-equity levels relative to its peers and poor earnings performance. Even though the company generates positive free cash flow, it has seen a slide in revenues over the past five years and on a number of performance metrics remains below its peers.
As already noted, Supervalu pays a dividend yield of 7.5%, on a payout ratio of 18% of trailing-twelve-month free cash flow. Its competitors The Kroger Co. (KR) and Safeway are paying dividend yields of 2.10% and 3.7%, respectively. Supervalu's shares, trading at $4.8 a share or 3.6 times the company's forward earnings, are down a staggering 43.7% year-to-date.
Another heavily shorted stock is that of Meredith Corporation. Short interest as percentage of the float for this magazine publisher and TV broadcaster hovers around 35.3%. The company has struggled to boost revenues in a highly competitive environment, although it tries to grow through acquisitions. The company has delivered a robust growth in dividends of 15.1% a year over the past five years. The $1.4 billion company pays a high dividend yield of 4.6% on a payout ratio of 55%. The company's peer Martha Stewart Living Omnimedia (MSO) does not pay any dividend. Competitors McGraw-Hill Companies (MHP) and Scholastic Corporation (SCHL) are yielding 2.3% and 1.7%, respectively. The stock is trading at $30.4 a share, or 11.5 times its forward earnings (well below its industry). It is down 7% from the beginning of the year.
Kinder Morgan has also seen high short interest activity. The $17.4 billion energy company operating pipelines and storage terminals has the ratio of short interest to the float at about 31.9%. Kinder Morgan has just completed its acquisition of rival El Paso. The company expects cost savings of $400 million a year. Kinder Morgan pays a dividend yield of 4.0% on a high payout ratio of 184% of earnings and a lower ratio of 53% of free cash flow. The company's rivals Enterprise Product Partners (EPD) and Williams Companies (WMB) pay dividend yields of 5.1% and 3.9%, respectively. The company's shares are changing hands at $32.4, or 27 times its forward earnings (above its industry ratio). The stock is down by a meager 0.2% from the start of the year.
Pitney Bowes is considered one of the dividend aristocrats, the companies that have paid dividends consistently for more than 25 years. The mail processing equipment and integrated solutions company has paid dividends since 1934. The company is yielding 10.9% on a payout ratio of 43%. As regards its competition, Pitney Bowes' competitors Xerox (XRX) and Cannon (CAJ) are yielding 2.4% and 3.6%, respectively. Still, the company's business model seems to be outdated and the company appears to be in a decline. The stock of this company has a relatively high short interest as percentage of the float at 26.8%. The company's stock is selling at $13.9 a share, or 6.8 times its forward earnings (above the industry ratio). The shares have sunk some 26.4% year-to-date.
Finally, Safeway, a food and drug retailer has seen relatively high short interest as percentage of the float at 25.7%. The company has seen strong revenue growth and free cash flow generation. It pays a dividend yield of 3.7% on a payout ratio of 34%. Its competitors, including Supervalu and The Kroger Co. pay dividend yields of 7.50% and 2.10%, respectively. Safeway's shares are changing hands at $19.2, or 9.2 times its forward earnings (well below the industry ratio). The shares are down 10.6% this year. Still, recently, Citibank upgraded the stock based on the grocer's top-line growth, pharmacy share gains, and attractive valuation.
Even though investors bet against these stocks, some renowned fund managers hold them as long positions in their portfolios. For example, Joel Greenblatt is bullish about Supervalu. David Dreman holds a 2.5% stake in Meredith Corporation. Both Dreman and Greenblatt hold small stakes in Pitney Bowes. Billionaires Leon Cooperman and Steve Mandel are long Kinder Morgan. Ray Dalio increased his small stake in Safeway by 234% in the first quarter of 2012.