If you're a dividend investor, you want confidence that the companies whose stock you own can deliver reliable payouts quarter after quarter. When a business hits a rough patch, a dip in earnings can jeopardize its ability to keep making those dividend payments.
Case in point: Schlumberger (SLB 0.08%), Regal Entertainment (NYSE: RGC), and Guess? (GES 2.76%) have all experienced difficult conditions recently that dragged their earnings below their total dividend payouts. That isn't always a serious danger in the short run, but these companies face ongoing challenges in their respective industries that could extend their shortfalls, potentially spurring them to cut dividends. Below, we'll examine their situations, and assess whether their dividend payouts are too uncertain for income investors.
|
Company |
Current Dividend Yield |
Payout Ratio |
|---|---|---|
|
Schlumberger (SLB 0.08%) |
3.1% |
500% |
|
Regal Entertainment (NYSE: RGC) |
3.9% |
101% |
|
Guess? (GES 2.76%) |
5.2% |
NM |
Data source: Yahoo! Finance. NM = Not meaningful due to negative earnings.
Dealing with an unenergetic energy market
Schlumberger has had to deal with extremely difficult conditions in the energy market. As an oil services specialist, it does best when its clients in the exploration and production segment have the greatest need for drilling supplies and related services. The plunge in oil prices back in 2015 sent demand tumbling: Its revenue shrank by more than 40% at its worst point, and the company posted losses in 2016.
Image source: Schlumberger.
More recently, though, Schlumberger has shown signs of improvement, including a profitable third quarter 2017 thanks to an uptick in drilling activity in North American shale plays. However, international activity levels are still troubling. Analysts expect Schlumberger's earnings to grow in the coming year, but even under the relatively favorable 2018 projections that call for the oil services giant's bottom line to double from 2017 levels, its earnings would still just barely cover its current dividend. If anything happens to jeopardize oil's rebound, Schlumberger could face pressure to cut its payout.
Regal's buyout: just in time?
Regal Entertainment is in an attractive situation for a dividend stock, as it has a buyout bid on the table. Industry peer Cineworld made a $3.6 billion offer for the movie theater chain, and the deal is likely to go through.
Two things make this stock unsafe. First, from a dividend perspective, Regal has delivered no significant earnings growth in recent years, and results over the past 12 months have fallen short of the $0.88 per share in payouts that the movie theater operator has made annually going back to 2014. Also, if anything happens to jeopardize the closing of the Cineworld merger -- anticipated for later this quarter -- Regal stock could fall substantially from its current zone just below the the $23 per share offer price. With just pennies of potential upside and plenty of downside, Regal isn't worth the risk to hold.
Should you bet on Guess?
Guess? is a well-known jeans brand, but the retail industry has been suffering recently, and the company hasn't been able to avoid the headwinds that have hit most of its peers. The fashion company has managed to sustain its strength in Europe and Asia, but its North American operations have dragged on its overall performance. Even on an adjusted basis, full-year earnings expectations in the $0.56 to $0.63 per share range leave Guess? well short of the $0.90 per share in dividends it has been paying out.
Some believe that U.S. retail is finally starting to pull out of its slump, and high-end brands could be the first to see some relief if that proves to be the case. Yet right now, investors don't even expect Guess? to earn enough to cover its dividend in fiscal 2019. Anything short of blockbuster results could spur a dividend cut.
Keep your eyes open
Dividend investing requires discipline and patience -- companies inevitably go through rough patches. Some of them emerge from those periods stronger, able to sustain and grow their dividends. But when it comes to these companies, that outcome is far from the sure thing that most conservative dividend investors would prefer from the stocks in their portfolios.
