1 Massive Dividend to Sell Today

The following video is part of our "Motley Fool Conversations" series, in which industrials editor/analyst Brendan Byrnes and consumer goods editor and analyst Austin Smith discuss topics across the investing world.

In today's edition, Brendan and Austin talk about a huge dividend that Brendan rates as a sell. R.R. Donnelley sports a massive dividend yield of nearly 10%, but unfortunately also sports a massive debt load that has grown each year for the past four fiscal years. The company has pursued an acquisition-heavy strategy that is partially responsible for increasing total debt to the $3.75 billion level it's at now. Brendan also worries that the dividend level is unsustainable, considering the company's 124% payout ratio and negative first-quarter cash flow position. Finally, R.R. Donnelley is operating in a declining printing industry that's increasingly moving digital. Check out the video below for more on R.R. Donnelley's future prospects.

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Austin Smith has no positions in the stocks mentioned above. Brendan Byrnes owns shares of Apple. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On May 31, 2012, at 2:09 AM, tommyk1963 wrote:

    There are many factual errors in this video.

    The key one being the payout ratio.

    In 2011 RRD earned $1.82 in EPS excluding extraordinary charges and $2.26 in cash EPS.

    In 2012 EPS is expected to be in the range of $1.84-$1.92 ($2.28-$2.36 cash EPS)

    The dividend is only $1.04 so the payout ratio is significantly below 100%.

    The solid free cash flow coverage which well exceeds the cash dividend proves this point as well.

  • Report this Comment On June 01, 2012, at 2:56 AM, FlaEd40 wrote:

    The Payout ratio is 57% or better, based on 1.84 reitterated earnings. (where did the 124% come from?)

    Other then being the worlds largest printer of it's kind (entirely different business then Pitney Bowes)RRD has moved into digital software are services at higher margins. They have been shedding unprofitable plants, consolidating operations, and improving margins.

    Smaller players have been getting pushed out of the business, a plus for RRD.

    Entry costs to compete with a company the size of RRD are huge, contrary to your statement regarding low barriers to entry.

    RRD has one of the highest short interest ratios in the S&P 500 at 24.4, 39.9% of the float. Shorts are working hard to make that a goood bet, but the recent action looks more to be a bottoming chart.

    As TommyK is saying - there are a number of factual errors, in addition to the ones mentioned, in your analysis.

    At worst, in my opinion, RRD is a hold at todays prices (yield @ 9.8%) to a buy if we see the price below 10.40.

  • Report this Comment On June 23, 2012, at 12:03 PM, Ion wrote:

    I agree with the other 2 respondents.

    In fact, and in light of the recent price action of RRD (outperforming the Dow, S&P and NASDAQ), I would like to have backed the truck up at below 10.40, but I I think the train has already left the station - to mix too many metaphors.

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