The yield on the benchmark 10-year U.S. Treasury note fell to all-time lows this past week as a combination of already-low interest rates and investor worry over the coronavirus spreading around the world sent investors fleeing from stocks and loading up on the security of bonds. At the same time, investors who have been selling riskier stocks and moving to bonds have helped drive dividend yields up for many stocks.
For a few, the sell-off has pushed them to rock-bottom levels. This includes global auto giant Ford (NYSE:F), offshore bank Bank of N.T. Butterfield & Son (NYSE:NTB), and small -- and potentially troubled -- retail property owner PREIT (NYSE:PEI). All three are at least 44% down from their three-year highs and have dividend yields that have been pushed up to sky-high levels.
Dividend stocks can be a great way to grow wealth or generate income, but the wrong investments can lead to big losses. Keep reading to learn what's happened to push these three stocks to rock-bottom levels and whether they look like stocks to buy or to avoid.
Ford is struggling but its dividend looks safe
It hasn't exactly been a great past few years for Ford. The company, along with many automakers that call North America a key market, have seen sales growth slow and even declines in certain segments.
For Ford, the weakness at home has been exacerbated by its struggles overseas, along with an ongoing plan to restructure its business that has yet to start driving any improvements on the bottom line. Once again last quarter, Ford said it lost market share and revenue declined slightly. That's not a great look when you've already taken $11 billion in EBIT (earnings before interest and taxes) charges and $7 billion in cash in recent years.
As a result, Ford's stock has fallen almost 50% over the past three years, and a terrible start to 2020 has erased what had been a bounce-back 2019 that saw shares gain almost 20%. But even in its current condition, Ford looks like a business worth buying. Sure, the company has problems and it's been slow to get traction with its turnaround efforts, but at recent prices, the dividend yield is above 8% based on the $0.15 per quarter the company pays.
Moreover, that dividend is still secure: Ford expects to earn about $1.20 per share in 2020, or more than double its current dividend, giving it a significant margin of safety to support the payout and still have money left over to continue spending on restructuring.
A niche bank that's very profitable and easy to miss
NT Butterfield operates in a niche in the commercial banking world that's easy for investors to miss out on: offshore international banking. The company's history is in Bermuda and the Cayman Islands and it recently expanded to the Channel Islands of Jersey and Guernsey after acquiring the banking operations there from a Dutch bank.
This makes it easy for retail investors to miss since it's not a name most people are familiar with. Despite that, it's come to be one of my favorite banks to own, and certainly my top bank to own for dividends.
Like Ford, Butterfield's stock price recently fell on underwhelming earnings that came in below year-ago levels. But unlike Ford, Butterfield's declining results were not the result of any ongoing structural problems or an extended turnaround effort. They're the result of additional operating expenses related to the Channel Islands acquisition and a recent expansion of its retail-banking operation in the Cayman Islands.
My expectation is that these investments may be adding more expenses today than they're providing in incremental profits, but once we get farther away from the initial expense and the company fully leverages and integrates its new operations, we'll start to see the results on the bottom line.
For investors willing to invest in that future today, Butterfield stock yields a hefty 5.9% dividend after the recent post-earnings sell-off, and shares trade for barely over nine times trailing earnings.
Rock-bottom price, sky-high risk
Pennsylvania Real Estate Trust, better-known as PREIT, also reported earnings recently and gave investors notice that the risk profile had shifted decidedly away from deep value and much closer to "this could get ugly." In short, the company announced that it "anticipates not meeting certain financial covenants during 2020."
Here's the thing: When a company doesn't meet the financial covenants of its debt, there's the risk of a default on that debt (meaning it comes due immediately). This creates a waterfall effect since once a company is in default on some of its debt, it almost always means it's in default on the rest of its debt, as a result. When that happens, the worst-case scenario is bankruptcy, and common shareholders fall to the back of the line behind everyone else with a claim against the company.
As a result of this announcement, PREIT's stock crashed by 26% on February 25, pushing its dividend yield above 32%. In case you're wondering, that's exactly what a dividend trap looks like.
Yet I think there's a decent chance that PREIT's management can make lemonade out of these lemons. On the earnings call, CEO Joseph Coradino said the plan is to modify debt covenants through September in order to give the company some breathing room to work through some ongoing asset sales and continue redevelopment work on its best properties. Coradino said the company is currently in compliance and expects to have modified agreements with lenders by the end of March.
Should you even consider PREIT? It depends. This is not an investment for anyone looking for income they can count on. But if you have capital that you're willing to lose on a bet that management can avoid defaulting, it's an interesting risk/reward investment to consider.