7 Companies That Pay Dividends but Are Burdened With High Debt

by: Adam Gefvert, CFA

Companies with high debt loads usually shouldn’t be paying dividends. That money could be better used to pay off debt. By paying dividends, the company is essentially borrowing money to pay its shareholders and sometimes at high rates of 6% or more.

Let Tasty Baking (TSTY) be a cautionary tale. The company continually borrowed to pay dividends, ignored its mounting debt problem, and now can’t make its principle payments and is most likely headed toward bankruptcy. If you can find the next TSTY and short it before the “debt hits the fan,” you can make a hefty profit. Check out my article on TSTY here.

These six other companies also have large amounts of debt yet still pay dividends.

Exterran Partners (EXLP): Natural gas compression services and equipment industry. Market Cap: 915M, Debt: 452M, Cash: 50k, Div Yield: 6.9%

Last 3 months up 11%, up 22.5% in the last year from increased revenue. Companies that keep such a low cash balance, like TSTY, put up a red flag.

Horizon Lines (HRZ) – Shipping services. Market Cap: 105M, Debt: 516M, Cash, 2.75M, Div Yield: 5.5%

Had adjusted EBITDA of $17M in Q4 2010 compared with $28M in Q4 2009. Revenue for 2010 is about the same as 2009: $1.2B. Rising fuel costs, pricing pressures on its Puerto Rico route, and start-up costs with a new China service will put pressure on Horizon Lines. Its average interest rate on its long term debt is 4.5%, which comes out to an interest expense of $5.8M per quarter. A new amendment requires the company to pay a 2.5% higher interest rate for more borrowings. A dividend cut is possible so it can pay more of its expenses and cut down borrowings.

Energy Solutions (NYSE:ES-OLD): Nuclear waste cleanup. Market Cap: 599M, Debt: 842M, Cash: 90M, Div Yield: 1.7%

It has slowly moved up in price in the last six months due to increases in cash flows. It has faced fines recently for inappropriate cleanups. Recently it jumped on rumors that it may get business to clean up Japan’s nuclear sites. If the nuclear energy industry pulls back, ES would be a good short.

KB Home (NYSE:KBH): Homebuilder. Market Cap: 1B, Debt: 1.78B, Cash: 904.4M, Div Yield: 1.9%.

With real estate at an all time low home building is discouraged. KBH had an increase in revenues in quarter on quarter this year, but may experience a decline with real estate values continually falling.

Unitil Corp (NYSE:UTL): Electricity and natural gas distribution in northeast US. Market Cap: 251M, Debt: 355.6M, Cash: 8.9M, Div Yield: 6%.

This stock is reaching its 52 week highs due to a 29% increase in revenue last quarter from 76.1M in Q3 2010 to 97.9M in Q4 2010. Utility operating costs are up by 4.1M in 2010 over 2009. Interest expense is up by 2.3 million in 2010.

Can UTL keep its revenues up in the competitive and volatile electricity and natural gas industry? We will see.

Crosstex Energy (XTXI): Oil and gas refining and marketing. Market Cap: 470M, Debt: 750M, Cash: 22.8M, Div Yield: 3.1%

Up 15% in last three months due to oil runup but revenue has not increased. With XTXI’s overload of debt, it’s priced to perfection.

Disclosure: I am short TSTY.