Everybody loves a good sale. That's especially true for investors who have an opportunity to scoop up favorite companies the moment they appear cheap.
If you're a dividend investor looking for great values, and you find a company sporting a dividend yield above 3.5% with a price-to-earnings ratio around 10, it can be tough to pass up. However, just as there are diamonds in the rough, there are many stocks matching this description that should be avoided. Here are three examples.
Death by Netflix?
Viacom Inc. (VIAB +0.00%) is the first stock on this list to avoid, despite the company boasting a dividend yield of 3.7% and a forward P/E, based on Morningstar estimates, of 9. You might not recognize Viacom by name, but you've likely heard of its more well-known cable networks. Those include MTV, Nickelodeon and BET, which do a great job of attracting notoriously difficult-to-reach teens, children, and African-Americans, respectively.
Netflix is luring customers who "cut the cord". Image source: Netflix.
But, even with those specialized audiences tuning in, Viacom's quarterly revenue barely moved higher during its fiscal third quarter with a 2% increase, and that was mostly due to filmed entertainment growth of 30%, which helped offset a 3% decline in the media networks segment. It should be noted, though, that even with 30% growth in filmed entertainment thanks to the Teenage Mutant Ninja Turtles, Viacom actually turned in an operating loss of about $26 million. Looking at its advertising business, due to weaker ratings, the company posted a 4% decline in the U.S. market.
The major problem with Viacom as a viable investment is that the industry is changing. It's easier than ever for consumers to "cut the cord," and load up on alternative entertainment such as Netflix, Hulu, or HBO Go; there's no guarantee that Viacom will adapt to the new environment. Not only that, but there are other content juggernauts to contend with, such as Disney on the filmed entertainment front, or a bigger Time Warner media company.
Viacom looks cheap, and its 3.7% dividend yield might seem tempting, but there are more questions and concerns facing the company than investors should accept for a long-term investment.
Death by e-commerce?
Kohl's (KSS +5.74%) is another stock that fits the bill of a tempting stock likely best avoided. It sports a 4.3% dividend yield, which is certainly enticing for income investors, and a forward P/E of 11, per Morningstar earnings estimates. And despite a solid quarterly result out Thursday, which propelled the stock up 16%, there are a couple of red flags for investors hoping Kohl's will be a market-beating stock over the long haul.
Image source: Getty Images.
One major red flag was the company's tardiness to the e-commerce strategy. At a time when Kohl's was enjoying strong growth in its brick-and-mortar stores, a major rival, Macy's, was launching its online retail website in 1996; it wasn't until half a decade later that Kohl's would launch Kohls.com.
Also, the surge in e-commerce leaves the door open to the possibility that Kohl's has too many stores; at the end of 2015 Kohl's had more than 1,150 stores -- many more than the roughly 730 Macy's stores. While Kohl's could end up succeeding with its e-commerce strategies, there are fundamental reasons to be concerned about the retail industry it competes in.
Retail competition brings us to another concern: The market has been flooded with competition, as there are few barriers to entry within the broad clothing-retail space. It's difficult to drive a couple of blocks without seeing stores such as TJX's T.J. Maxx or Marshalls, Ross Dress for Less, or Nordstrom Rack, to name a few.
With e-commerce putting pressure on margins, a store count that could be too large, and increasing competition in an industry where it's difficult to differentiate yourself, there are too many concerns to buy into Kohl's long-term growth story.
Death by commoditization?
MetLife Inc. (MET +3.34%) turned in a disappointing second quarter, which isn't much of a surprise considering that the low-interest-rate environment is tough on the company's business. Despite MetLife being really cheap, with a forward P/E of 7, and yielding a dividend of 3.7%, it's a company with too many question marks for long-term investors.
Image source: Getty Images.
One of those question marks is just how the industry works: Insurers often don't fully understand the full cost of goods sold for years after the fact, which makes finding optimal pricing for policies more difficult. Making this issue worse is that insurers are more likely to underprice their policies, thanks to intense industry competition that has essentially rendered insurance policies into commodities. A factor that goes hand-in-hand with commoditization is the inability to differentiate a company's insurance policies from a competitor's. That's partly due to insurance policies and structure being easily copied or replicated.
The kicker for potential MetLife investors is its business overseas. The company has expanded internationally, and while overseas markets provide growth opportunities, there's no telling whether these new markets will create value for shareholders or destroy it.
Ultimately, MetLife operates in an industry that has commoditized its products, at a time when low interest rates make generating strong returns for investors much more difficult, and the international growth story is far from a sure thing. Despite being cheap and boasting a yield of 3.7%, it just offers too much uncertainty for long-term investors.
