Dividends in Danger? Nokia, CenturyLink and 5 Others Attract Attention

by: David Van Knapp
This is the fourth installment in a monthly series that collects and summarizes SA members’ opinions about companies whose dividends may be in danger. Not all information for each company has been independently verified. Readers’ comments have been integrated and edited. If you wish to see the full comment stream, consult last month’s article.
Always perform your own due diligence before making any investment decisions.
Sysco (NYSE:SYY) has been extensively discussed in each article since this series began, and it drew a few more comments this month. The consensus on Sysco still seems to be that its dividend is not in great danger, but that it bears watching because of the effects of rising food costs on the company’s cash flow. A “food fight” broke out between a commenter that highly criticized Sysco’s product quality and those that defended it, but that seems tangential to the dividend question. Sysco has in fact raised its dividend for 41 straight years, and its next increase would normally come in January, 2012. The following points were made this month:
  • For the first time in several quarters, SYY’s cash position has actually improved.
  • Chuck Carnevale wrote a favorable article about SYY in late April that should have been mentioned last time: “Sysco: Gourmet Stock at Fast Food Price with Sweet Dividend Dessert.” Chuck’s detailed analysis concluded that, “[W]e believe that their dividend which has increased in each of their 40 years as a public company is well covered and should continue to grow. The current yield of approximately 3.6% is reflective of the fact that their stock currently trades at a discount to their historically normal price earnings multiple.”
Frontier Communications
Shortly before last month’s article was published, Frontier (NYSE:FTR) announced its fourth consecutive dividend at $0.1875/share. This puts it in the Frozen Dividends category. There is a separate section below about frozen dividends. The dividend was dropped 25% to its current amount last September, after the company had maintained its previous dividend of $0.25/share frozen for the previous four years. As mentioned last month, the company’s announced plan is to hold the dividend steady for the next two years while they fully integrate wirelines acquired from Verizon (NYSE:VZ), and then begin raising the dividend again, presumably in 2012-2013.
Meridien Bioscience
Conversation continued about Meridien (NASDAQ:VIVO). It was noted as having earnings that did not cover their dividend last year, will barely cover it this year, and next year might recover enough to allow for a tiny increase. Meridien has publicly announced a policy of setting a payout ratio of between 75% and 85% of each fiscal year's expected net earnings, although it is hedged by language that the actual declaration and amount of dividends will be determined by the board of directors in its discretion based upon its evaluation of earnings, cash flow requirements and future business developments, including acquisitions. (See press release.)
Nokia (NYSE:NOK) was added to the list of stocks on watch. The company announced sliding sales volume and prices for its products, and "removed all earnings guidance for the remainder of 2011." (See Dow Jones news report.) The company’s announcement, on May 31, was followed by a slew of downgrades, takeover rumors, denials that it was for sale, “no comments” by other companies that they were seeking to take it over, replacement of its chief technology officer, and severe price drops.
The stock hit a new 52-week low on June 16. The stock’s yield has ballooned to 9.5%, but a couple of commenters said that it would be foolish to chase that yield.
Harsco (NYSE:HSC) was noted as having a payout ratio exceeding 100% of earnings. The company just announced its most recent dividend on June 14. (See press release.) This will be the 7th consecutive dividend of the same amount, making it another frozen dividend.
CenturyLink (NYSE:CTL) drew commentary:
  • CTL has been generating some dividend cut discussion. Although it has a 37-year dividend-growth streak, key worries are integration risk from a couple of mergers and a high payout ratio of earnings. Additionally, CTL missed its dividend-increase anniversary in March, but it has done this before and still kept its streak alive.
  • On the positive side, the payout ratio of free cash flow (FCF) is just 50%. Also, ROE and some other metrics don't flag a CTL dividend cut, and management has stated that they can do the mergers and maintain the dividend.
  • In 2008, when CTL's board boosted the quarterly dividend by more than 10x, it stated its intention to pay out "essentially all" of its FCF to shareholders rather than basing its payout ratio on earnings per share. The company then went six quarters before raising the dividend, and it may be on track for another six-quarter period between increases. While there may be no imminent danger of a cut, future increases may not be substantial. CTL’s last increase, in March, 2010, was 3.6%. Its yield is already high at about 7.3%.
Old Republic International
Discussion of Old Republic (NYSE:ORI) was revived after almost fading out. Previous reasons for concern had included negative cash from operations, declines in receivables, increases in payables, and Yahoo’s reporting of the payout ratio at 531%. ORI has a 30-year increase streak going, although its most recent increase was just 1.5% in March.
This month a reader stated that in his opinion, the dividend at ORI is in serious danger, especially if they are forced to support their mortgage insurance subsidiary. Also, they were "foolish enough" to buy stock in two of their competitors. It is questionable whether their other businesses can generate enough profit to overcome these losses.

One Quicky
The following stock received no further comments last month, and it will be dropped from next month’s article if it draws no further discussion.
  • Hudson City Bancorp (NASDAQ:HCBK). Hudson City had been identified in earlier articles as having a dividend in danger, and the company did indeed cut its dividend on April 20. The dividend was chopped by 47%. Even with its dividend cut, HCBK still has a projected yield of nearly 3.5%, but of course its former 12-year streak of increasing dividends is over.
Frozen Dividends, Foreign Dividends, and Other Items of Discussion
Each month, David Fish presents an article on frozen dividends: Companies whose last dividend increase is more than a year ago. David and I time our articles so that his appears before this one each month. David’s most recent article on the subject is “30 ‘Overdue’ Dividend Increases: Payouts in Peril?” There are some well-known dividend-growth stocks that appeared this month, including CenturyLink (CTL), Harleysville Savings (NASDAQ:HARL), Meridien Bioscience (VIVO), PG&E (NYSE:PCG), PPL (NYSE:PPL), and United Bancshares (NASDAQ:UBSI).
As has been discussed in earlier articles, a dividend freeze can be a precursor to an actual cut. Please see David’s article for more information.
There were also interesting exchanges of comments on two dividend subjects. Rather than reproduce them here (it would double the size of the article), I will give a brief overview here and let you read the comments yourself beneath last month’s article.
  • One thread discussed factors that can be red flags for dividend cuts. Among the signals flagged were payout ratios above 100%; and the absence of a strong “dividend culture," evidence of which can include a short streak of increases.
  • Another thread discussed the different dividend practices between American (Type A) and foreign (Type F) companies. Type A companies tend to smooth their dividends, while Type F’s tend to let their dividends track their earnings, which can make them lumpy and less likely to compile a very long streak of consecutive annual increases.
Other Articles of Interest
This article appeared within the last month:
About This Series
The goal of this series is to provide a place where SA readers can trade ideas and pool knowledge about dividends that may be in peril. The first three articles have attracted more than 51,000 views and generated more than 350 comments, so it is a subject that SA readers appear to be interested in.
One commenter last month offered several suggestions for making the discussion of each stock more elaborate. His ideas did not gain traction. Most readers seem to understand that the purpose here is to alert each other to stocks that may have dividends in danger for any reason. It’s great when people pool their knowledge and ideas for the benefit of all. In the end, though, it is up to each person to do their own due diligence and make their own decisions.
Thanks for your continued interest, and please comment on companies that you think might have dividends in danger!
Please use the Comments section to discuss the companies mentioned in this article or to nominate other companies for the Dividends in Danger series. If you feel that an entire industry is in danger, please explain why and give examples of companies in the industry that are at risk. The best comments are focused, factual, specific, and reasoned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.