3 Stocks with unsustainable dividends

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Transcript of 3 Stocks with unsustainable dividends

  • Why These 3 Stocks Have Unsustainable Dividends
  • First, lets see what makes a dividend unsustainable
  • The payout ratio By far, the number one indicator of a healthy dividend is a low payout ratio The payout ratio tells you how much of a companys earnings are being paid out as dividends
  • An example Consider the case of Microsoft, which pays a dividend of $1.12 per year (a 2.7% yield) Microsoft is expected to earn $2.70 this year So, the payout ratio is $1.12 $2.70 = 0.41 In other words, Microsoft pays out 41% of its earnings as dividends
  • The significance of the low payout ratio is that if Microsofts earnings were to drop unexpectedly, the dividend should be safe
  • Payout ratios of some popular dividend stocks (Based on 2014 consensus earnings)
  • REITs: A special case Some of the highest-paying stocks on the market are real estate investment trusts (REITs) These should have a high payout ratio, as REITs are required to pay out at least 90% of earnings for tax purposes Ideally, REITs should have a payout ratio between 90-100%
  • ARMOURs dividend is sustainable ARMOUR Residential REIT pays a dividend yield of 13.9%, but the company has a healthy payout ratio ARMOUR pays $0.05 per month, or $0.60 per year
  • The company is projected to earn $0.62 in 2014, making the payout ratio 96.8%, right in the good range for REITs So, while ARMOURs dividend is high, it makes sense financially, based on the companys earnings
  • Other red flags to watch for 1. Very high debt - especially if the debt repayment obligations are high, relative to cash flow 2. Lots of layoffs may be indicative of problems with the business 3. Reduced earnings guidance means the company might see trouble ahead 4. Dividend cuts by peers
  • 3 Companies with UNSUSTAINABLE dividends
  • Western Mortgage Asset Capital Corp (NYSE: WMC) The company pays out $0.67 per quarter ($2.68 per year), but is only expected to earn $2.38 annually during 2014 and 2015 This is a payout ratio of 113%, meaning the company wont earn enough to cover the dividend Current Yield: 19.5%
  • Resource Capital Corp (NYSE: RSO) This REIT focuses on commercial real estate debt, and pays $0.20 per quarter ($0.80 per year) Projected earnings of $0.52 (2014) and $0.73 (2015) This implies payout ratios of 154% and 110% for the next 2 years Current Yield: 14.4%
  • Windstream Holdings Inc. (NASDAQ: WIN) Windstream offers broadband, phone, and TV services The company has paid out $1.00 per year for 8 consecutive years However, earnings have deteriorated in recent years Just $0.31 per share is expected this year Current Yield: 10%
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