If you're a dividend investor, you're probably aware of the risks of investing in companies that offer unsustainably high dividend payouts. But what about those corporations that don't pay out enough of their earnings to shareholders? In this article, we'll look at three examples of fairly well-known corporations that issue dividends at an embarrassingly low yield, payout ratio, or both: Cooper Tire & Rubber Co. (CTB +0.00%), Universal Health Services, Inc. (UHS 1.20%), and Tyson Foods, Inc. (TSN 0.10%).
Image source: Getty Images.
We begin with Cooper Tire & Rubber, North America's fifth-largest tire manufacturer, which was incorporated in 1930. The tire sector is somewhat cyclical and tied into the fortunes of the automobile industry, not to mention wider economic trends.
In the following table, we'll take a birds-eye view of Cooper's dividend and related financial metrics. The "payout ratio" is simply a company's total annual dividend paid divided by net income.
| Metric | Amount |
|---|---|
| Annualized dividend | $0.42 |
| Total dividends paid TTM | $23.1 |
| Net income TTM | $238.3 |
| Payout ratio | 9.84% |
| Dividend yield | 1.06% |
| Cash from operations TTM | $343.8 |
| Share repurchases TTM | $100.5 |
Data: Ycharts and Yahoo Finance. TTM = Trailing 12 Months. Except for "annualized dividend," which is a per-share amount, all dollar figures in millions.
One can understand if management doesn't want to issue a dividend at the peak of an industrial cycle that can't be maintained when sales thin out. The company offers a current quarterly dividend that yields 1.07% annually at a payout ratio of just 9.8%, so executives should really consider sharing more with investors on a quarterly basis.
But Cooper hasn't totally forgotten about stockholders, having recently loaded up on share repurchases. In 2014 and 2015, the tire manufacturer repurchased $308.8 million of its own shares, or about six times the amount it paid shareholders in dividends over the same period.
Next up, we have Universal Health Services, which owns and operates acute-care hospitals, behavioral health facilities, and surgical hospitals, primarily in the U.S. and the U.K:
| Metric | Amount |
|---|---|
| Annualized dividend | $0.40 |
| Total dividends paid TTM | $39.0 |
| Net income TTM | $701.9 |
| Payout ratio | 5.60% |
| Dividend yield | 0.37% |
| Cash from operations TTM | $1,325.0 |
| Share repurchases TTM | $368.30 |
Data: Ycharts and Yahoo Finance. TTM = Trailing 12 Months. Except for "annualized dividend," which is a per-share amount, all dollar figures in millions.
"UHS" produces both healthy net income and operating cash flow, although a significant amount of cash flow each year gets committed to capital expenditures and acquisitions. For example, in fiscal 2015, the company generated $1.02 billion in operating cash flow, but spent $913 million on fixed-asset purchases and business acquisitions.
Nonetheless, like Cooper Tire & Rubber, Universal prioritizes share repurchases, having used the rough equivalent of half of corporate net income over the past 12 months to buy back its own stock. Meanwhile, dividend payouts totaled just $39.0 million, for an anemic payout ratio of under 6%, and a paltry yield of just over a third of 1%.
Finally, let's look at Tyson Foods, the frozen meat and prepared foods behemoth that just posted its fourth-consecutive record fiscal year in terms of operating income, operating margin, and operating cash flow:
| Metric | Amount |
|---|---|
| Annualized dividend | $0.60 |
| Total dividends paid TTM | $216.0 |
| Net income TTM | $1,768.0 |
| Payout ratio | 12.20% |
| Dividend yield | 1.10% |
| Cash from operations TTM | $2,716.0 |
| Share repurchases TTM | $1,944.00 |
Data: Ycharts and Yahoo Finance. TTM = Trailing 12 Months. Except for "annualized dividend," which is a per-share amount, all dollar figures in millions.
I sense a theme developing here, don't you? Tyson has enjoyed extremely vigorous cash flow over the last several years, in addition to its healthy profits. Yet the vast majority of available cash is being funneled into share repurchases.
Thus, the company only pays out one-eighth of every net income dollar to shareholders, for a dividend yield of approximately 1%. And its current share repurchases are outpacing net income, which is an equation that can only hold up for so long.
Two views of share repurchases
In each example above, dividends suffer at the expense of stock repurchase programs. Share buyback initiatives can have mixed results. On one hand, buying back common stock reduces a company's outstanding shares, and this increases each remaining shareholder's share of net income. Also, a significant repurchase program can temporarily lift a stock when a company begins buying its own ticker on the open markets.
On the other hand, organizations sometimes buy their own shares back at inflated prices -- a particular risk in the current environment, as both the major indices and many well-capitalized stocks are trading near all-time highs. And some investors believe that share repurchases can ultimately represent a waste of resources if a stock's price declines substantially after a buyback program concludes.
Given the mixed opinions on this popular form of shareholder return, each company above could benefit from a more robust dividend policy. A general rule of thumb for a reasonably safe dividend pegs the payout ratio at below 50%. The average payout ratio for S&P 500 Index constituents currently sits at 40.2%, which is a decent benchmark, and well in excess of any of the companies we've discussed in this article.
Consistent, growing dividends not only signal the stability of a company's economic model, but they tend to increase shareholder loyalty. More pertinently, the management teams of Cooper Tire & Rubber, Universal Health Services, and Tyson Foods may not fully appreciate how much dividend expansion attracts consistent retail and institutional investment interest. That's a long-term support under a stock price that's supported by share repurchases for short stretches only.
