Dividend Danger Zone: 4 Yields That Look Unsustainable

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Includes: CTL, FTR, PBI, WIN
by: Efsinvestment

Dividend-paying stocks can be a lifesaver in this environment, if you want to make some serious money. Therefore, it is vital to look for the highest-yielding stocks.

Dividend-paying stocks may not be as sexy as speculation or high-octane growth names, but you know what? Who needs sex appeal? Dividends work. You absolutely must own a high-yielder. Dividends protect your stocks, and they’re also a terrific way to make money. -- Jim Cramer

Besides the high-yield, sustainability of dividends is essential for income-oriented investors. Investors should not only consider the dividend yields but also the sustainability. I noticed four stocks with nifty yields, but there is a high possibility that these stocks may not be able to offer the same yield in the future. I have analyzed these stocks from a fundamental perspective, adding my O-Metrix Grading System where necessary. Here is a fundamental analysis on the dividends in danger. (Data obtained from Finviz/Morningstar, and is current as of Aug 30):

CenturyLink, Inc. (NYSE:CTL): CenturyLink will distribute a $0.725 quarterly dividend on Sept. 16. The company shows a trailing P/E ratio of 17.4, and a forward P/E ratio of 19.0, as of Aug 30. Analysts expect the company to have an annual EPS growth of -0.02% in the next five years, which sounds reasonable given the 4.75% EPS growth of past five years. With a profit margin of 8.0%, CenturyLink offered a gorgeous dividend of 8.19% last year.

O-Metrix score of the company is 2.24, while it is currently trading 21.78% lower than its 52-week high. Target price is $43.38, implying an about 22.4% upside potential. Insider transactions have increased by 86.05% in the last six months, and institutions own 73.37% of the stock. It returned -1.5% in the last twelve months, whereas gross margin is 63.0%. On the other hand, debts nearly tripled in the last quarter. SMA50 is -4.71%, while SMA200 is -12.02%. ROE is 4.9%, way lower than the industry average of 14.0. Earnings decreased by 78.54% this year. If you accept the risk, then CenturyLink can return substantial profits to you. However, I would pick a safer and more profitable investment instead. Here are the recent dividend payments of the company per share:

Jun 2, 2011

$0.725

Feb 16, 2011

$0.725

Dec 3, 2010

$0.725

Sep 2, 2010

$0.725

Frontier Communications Corp. (NYSE:FTR): Frontier will feature some premier high school football games on its Game On! video system. The Connecticut-based company was trading at a P/E ratio of 45.2, and a forward P/E ratio of 26.0, as of Aug 30. Estimated annualized EPS growth for the next five years is 1.5%. Although profit margin is thin (3.0%), dividend yield is terrific (10.14%).

Frontier Communications has a poor O-Metrix score of 1.63, whereas it is trading 20.29% lower than its 52-week high. Target price is $10.97, indicating a 46.4% increase potential. Institutions hold 50.92% of the stock, and it returned -2.8% in a year. Yields are decreasing, while debt-to-assets ratio is strolling around 50%s. Earnings decreased by 71.39% this quarter, and 39.88% this year. ROA, ROE, and ROI are 1.32%, 6.25% and 1.78%, respectively. I would not keep it just for its dividend. Recent dividend history is as follows:

Jun 7, 2011

$0.188

Mar 7, 2011

$0.188

Dec 7, 2010

$0.188

Sep 7, 2010

$0.188

Pitney Bowes Inc. (NYSE:PBI): Pitney Bowes recently introduced its MarketSpace Web platform. As of the Aug 30, Pitney Bowes shows a trailing P/E ratio of 11.6, and a forward P/E ratio of 9.2. Analysts estimate a -1.0% annual EPS growth for the next five years, which is reasonable when its 4.00% EPS growth of past five years is considered. Profit margin (6.3%) is slightly higher than the industry average of 5.3%, while it offered a 7.39% dividend last year.

Pitney Bowes has an O-Metrix score of 3.07, while target price implies an 11% upside movement potential. Earnings increased by 61.67% this quarter, and institutions own 88.16% of the stock. It is currently trading 21.39% lower than its 52-week high. Debt-to-assets ratio is slightly decreasing for the last five quarters, and it returned 4.1% in a year. On the other hand, earnings decreased by 27.86% this year. SMA50 and SMA200 are -3.86% and -11.94%, respectively. Insiders have been exercising options for a while. Debt-to equity ratio is 55.1, which is at an alarming rate given the industry average of 2.5. Hold if you own it, but I do not think that buying would be wise for now. Following is the recent dividend history of Pitney Bowes:

Aug 10, 2011

$0.37

May 11, 2011

$0.37

Feb 16, 2011

$0.37

Nov 17, 2010

$0.365

Windstream Corp. (NASDAQ:WIN): Windstream just increased its Internet speed it provides. The Arkansas-based tech stock was trading at a P/E ratio of 22.3, and a forward P/E ratio of 14.3, as of Aug 30. Five-year annualized EPS growth forecast is -1.0%. With a profit margin of 6.9%, Windstream paid a 8.10% dividend last year.

O-Metrix score of the stock is 1.93, while earnings decreased by 13.99% this year. Target price is $13.65, which implies a 9.2% upside potential. The stock is trading 8.07% lower than its 52-week high, while it returned 10.2% in the last twelve months. Debt-to-assets ratio is hovering around extreme rates since 2006. P/B is 7.9, and debt-to equity ratio is 9.0, both of which are strong red flags. Moreover, the company has a two-star rating from Morningstar. Ten out of eighteen analysts covering the company recommend holding. My opinion is no different. Windstream might be worth holding, but not more. Recent dividend history:

Jun 28, 2011

$0.25

Mar 29, 2011

$0.25

Dec 29, 2010

$0.25

Sep 28, 2010

$0.25

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