The coronavirus crisis has brought even the most stable companies to their knees.
Dividend Aristocrats, the vaunted group of S&P 500 companies that have hiked their dividends every year for 25 years, are some of the most reliable stocks on the market. After all, you can't make the list without weathering a few recessions, including the financial crisis a decade ago, and only 57 companies qualify. However, the coronavirus has brought an unprecedented challenge to even the most unshakable stocks. A number of them have slashed their guidance, or thrown out their forecasts altogether due to the headwinds and uncertainty from COVID-19.
Members of the group know that their status as an aristocrat burnishes their reputation among investors, and tend to go to great lengths to keep up their streak of dividend hikes. However, in a crisis like the current one, more than a few Dividend Aristocrats are struggling to maintain their dividend payments. Below are three that could be forced to slash their quarterly payouts.
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1. VF Corp
VF Corp (VFC 0.30%), the owner of popular apparel and footwear brands including Vans, Timberland, and North Face, has been a powerhouse in apparel for ages. In fact, the company has paid increasing dividends for 46 years. VF last raised its dividend 12% in October 2019, though the actual cash payout declined from the previous year as the company spun off its jeans business, now called Kontoor Brands. Including the dividend from Kontoor, investors have received an overall increase.
Today, the apparel industry is being hit hard by the coronavirus pandemic. Clothing stores are closed across the country as they aren't essential businesses, and on top of that, demand for new duds has plummeted as Americans are mostly stuck inside their homes. In March, apparel retail sales plunged 50%, and the outbreak didn't really hit the country until the middle of the month. Apparel retailers like VF will also be stuck with seasonal inventory that will be difficult to sell at other times of the year.
In March, the company announced steps to conserve cash during the crisis, including suspending share buybacks, reducing executive compensation, and drawing down $1 billion from its revolving credit facility. Management said it would continue to pay its dividend and was not considering suspending it. VF's dividend costs the company about $750 million a year, or about half of its profits during normal business.
However, with most of its stores around the world closed, the company is essentially limited to e-commerce sales -- and if the impact of the virus lasts VF will burn through much of its cash, putting its dividend in jeopardy.
2. ExxonMobil
The oil market has been hit hard by a combination of the coronavirus pandemic and a untimely price war between Saudi Arabia and Russia. West Texas Intermediate futures for May delivery went negative, and contracts for future months remain unusually low as the shelter-in-place orders and the collapse of air travel have sapped demand.
Like other companies, ExxonMobil (XOM 1.59%) has taken steps to shore up its cash position. It's reduced capital expenditures for the year by 30%, or $10 billion, chopped cash operating expenses by 15%, and reduced production in the Permian basin in Texas. Explaining the decision, CEO Darren Woods said, "Our objective is to continue investing in industry-advantaged projects to create value, preserve cash for the dividend and make appropriate and prudent use of our balance sheet."
Last year, the company spent all of its $14.3 billion in generally accepted accounting principles (GAAP) earnings on its dividend, and dividend payments nearly tripled what it generated in free cash flow. Now, the crash in oil prices will put its cash flow even more at risk and put pressure on the dividend, which it's raised every year for 36 straight years. Exxon generally hikes its dividend in late April, but with Wall Street analysts already anticipating a loss for the year, the company's 8.3% dividend yield may be too good to be true. At the very least, the oil giant could push the increase out later in the year when there's less uncertainty.
3. Leggett & Platt
Leggett & Platt (LEG 1.24%) may not be a household name, but you may be using a Leggett & Platt product at home -- the company makes components for bedding and furniture, including spring coils, structural fabrics, and quilting machines. Since many of its customers are big-box retailers, specialized retailers, and contractors and manufacturers, the company is sensitive to the business cycle, especially the kind of shock hitting the retail industry right now, as it's considered a consumer discretionary stock. Mattresses are also expensive, durable goods, and consumers tend to delay such purchases in down economies.
In a statement in early April, the company withdrew its guidance for the year, and said it was experiencing a significant reduction in demand in many of its markets. Leggett & Platt has also closed a number of its facilities due to the decline in demand and government orders.
The company did not provide details on its liquidity position, but a significant pullback in demand could lead to a financial loss, and a potential cut in its dividend. Last year, the company paid out 61% of its profits in its dividend, boosting it for the 45th year in a row.
For these aristocrats and others, the longer the crisis goes on, the more they will be at a risk of falling off the elite list, as a number of them operate in industries that are being directly impacted by the pandemic, including retail, restaurants, energy, and manufacturing. Even if they remain aristocrats, the backflips they do continue raising their dividends, taking on excess borrowing and cutting back on investments, may only hurt them in the long term.
Though plenty of these top dividend stocks will hike their payout this year, the challenges above are a reminder that a reliable dividend stock is hard to find in times like these.
