It may be Valentine's Day, investors, but every portfolio pick isn't a storybook romance. There will always be stocks that fail to live up to expectations. Cupid is never a perfect marksman when it comes to Wall Street.
There are stocks you love, and then there are stocks you will love to hate. Let's go over a few investments -- CenturyLink (NYSE:CTL), Rite Aid (NYSE:RAD), and GameStop (NYSE:GME) -- that you may want to break up with before things start to get serious.
Some dividends are just too good to be true, and that's the grim reality for income investors who bought into CenturyLink for its juicy yield without checking on its ability to cover its hefty payouts. The regional telco is slashing its distributions this week, reducing its quarterly checks from $0.54 a share to a mere $0.25 a share. The move halves its yield from 14.7% to 6.8%.
The problem with CenturyLink is that you have to go all the way back to 2010 to find the last time it earned enough to cover its dividends. It went through several large acquisitions in moves to pad top-line results and realize cost-saving synergies, but at the end of the day, you can't surf with a payout ratio north of 100% forever before wiping out.
Sometimes investors think that they know what's best for a company, and wind up being wrong. The hearts of Rite Aid shareholders may have been in the right place last year when they showed their displeasure with the drugstore operator's plan to merge with supermarket giant Albertsons. Rite Aid had come off a devastating blow earlier when regulators refused a larger drugstore chain's more lucrative buyout deal, and some retail and institutional investors felt that Albertsons was getting too much of the proposed combination.
Sensing inevitable defeat, Rite Aid called off the shareholder vote last summer. The stock has gone on to shed more than half its value. The headwinds are strong for the industry, as everything from challenging reimbursement rates to the potential threat of dot-com competition is making it hard for deal-dissing investors to get the last laugh.
The video game retailer and strip mall staple is another company that recently decided it would be best on its own. GameStop stock tumbled after the announcement that the chain was no longer smoking out potential suitors.
GameStop remains very profitable, and unlike CenturyLink's, this chunky dividend is sustainable in the near term. The problem with GameStop is that the concept has nowhere to go but down from here. Digital delivery will continue to eat into sales, and (more importantly) into the high-margin resale of used games that has been a cornerstone of the GameStop model.
GameStop is in a stronger financial state than CenturyLink or Rite Aid, but the clock is ticking on a business refresh. We may never know if it was arrogance on GameStop's part or a lack of potential bidders that kept it from the auction block earlier this year, but regardless, peak GameStop is fading in the rearview mirror.