Sky-high dividend yields aren't always great investments. To the contrary, extreme yields often point to deep flaws in the underlying business. Those overly generous payouts won't be around forever because the company may need to redirect that cash toward keeping the lights on.
On that note, I'd like to highlight a few bountiful dividend yields that seem destined for a big cut in the near future. The companies under this lens today are mall retailer Macy's (M -1.91%), regional telecom CenturyLink (LUMN 2.11%), and movie theater advertising specialist National CineMedia (NCMI 2.42%).
A painful parade
Check out the latest Macy's earnings call transcript.
The dividend yield at Macy's stands at an impressive 5.9% today. The company has increased its quarterly payouts by 51% over the past five years but the last dividend boost arrived three years ago. Since the winter of 2016, Macy's has been holding its payouts per share steady at $0.3775 per quarter, or $1.51 per share on an annual basis.
Over the same period, share prices fell 36% lower. That's still a healthy rebound from the dark days of December 2017, but hardly a welcome multi-year trend. And the stock has gone back to its old negative trend lines in the last six months.
It's for good reason, too. The store chain's top-line sales fell 7% lower in the last three years and EBITDA profits stalled at a similar pace. We're watching Macy's struggle against the onslaught of online retailers with leaner and meaner operating costs, and it isn't entirely clear that Macy's will survive this sea change in the long run.
The company spent $462 million on dividend checks over the last four quarters, culled from $1.1 billion of free cash flows. I would not be surprised to see Macy's earmarking some of its current dividend budgets for other purposes someday soon. The board of directors and management team might want to accelerate their debt reduction program if nothing else -- Macy's carries a crushing $5.5 billion long-term debt load today.
No gold on this silver screen
Check out the latest National CineMedia earnings call transcript.
National CineMedia is a different story. This company has not raised its regular payouts since 2012 but already reduced its dividend checks by 23% at the end of 2017. The dividend yield stops at 9.7% today, following a 56% three-year drop in National CineMedia's share prices.
The recent dividend cut didn't actually tighten National CineMedia's cash-cost belt by much. Around the same time, the company also increased its share count by 30%. That's not really a choice but a matter of following court orders, as parent company AMC Entertainment (AMC -0.15%) was ordered to reduce its holdings in National CineMedia to less than 5%. This was done by converting membership units in National CineMedia, LLC, into publicly traded shares of National CineMedia, Inc.
Take a deep drink of cold water to clear your head from that complicated ownership mess and do the math, and you'll find that the company is allocating more cash to its dividend policy nowadays in spite of the reduced payout per share.
Like Macy's, National CineMedia is nursing a huge debt load. The company is balancing $27 million of cash equivalents $139 million of annual free cash flows against $915 million of long-term debt. Cord-cutting consumers threaten National CineMedia's very livelihood and the tangled relationship with AMC muddies the waters further. Another dividend cut would make sense right here, and I can't come up with much of a reason to own this crazy stock anyway.
I just called to say your dividend is going away
Check out the latest CenturyLink earnings call transcript.
Then there's CenturyLink. The size of this dividend check hasn't changed since early 2013 -- when it was reduced by 26%. Meanwhile, the company keeps issuing large batches of additional shares to pay for several supposedly game-changing buyouts. Over the last decade, CenturyLink's share count has grown nearly 10 times larger. That includes nearly doubling the share base to acquire long-distance networking expert Level 3 Communications in 2017.
CenturyLink's shares have taken a 41% haircut in three years, pushing the dividend yield higher despite a complete lack of boosted payouts. Right now, that yield stands at a monstrous 14.4%.
And the enormous share offerings never settle the full price of CenturyLink's big deals. The company now sits on a cushy $36.5 billion long-term debt load and just $390 million of cash equivalents. The company did produce $3.2 billion of free cash flows in the last four quarters but also paid out dividends of $2.3 billion.
You don't have to take my word for CenturyLink's flimsy prospects. Analyst firm Guggenheim recently downgraded this stock to a "sell," noting that CenturyLink is struggling to adapt to a rapidly changing telecom market and the dividend is sure to get sliced down to size soon. That negative event "is a when, not if, debate," said analyst Mike McCormack. The company should probably cancel its dividend altogether and reinvest that cash in debt payments and network upgrades.