Buying dividend stocks is an appealing strategy for certain investors. In particular, these stocks provide investors with a source of income, and companies send a positive signal when they consistently raise their payouts.
However, it is important to look past the dividend yield and conduct a deeper dive to see if such stocks can maintain their payouts. After all, you certainly don't want to add a company to your portfolio believing the dividend is safe, only to have the rug pulled out from under you. Not only will this provide you with less income than you thought, but the stock price may fall in response, since many investors interpret a dividend cut as a negative indicator of a company's prospects.
To save you from this scenario, below are some companies that could cut their payouts.
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1. Newell Brands
Despite its collection of well-known consumer brands such as Paper Mate, Sharpie, Coleman, Sunbeam, Graco, and First Alert, Newell Brands (NWL 0.77%) has struggled with competitive pressures for some time, even before the coronavirus pandemic struck. This has led the company to implement a turnaround plan that is pushing stronger categories, innovation, and cost-cutting measures.
However, these efforts have not yet improved results. Newell's 2019 sales fell by 4% from $10.1 billion to $9.7 billion, and its adjusted income from continuing operations dropped by 2% from about $691 million to $677 million.
Its first-quarter results, affected by COVID-19, saw sales fall by nearly 8% to $1.9 billion. With intense competition and a sluggish economy, it is unclear when Newell's top and bottom lines will pick up.
Turning to the balance sheet, Newell has a fair amount of debt. In May, the company issued a $500 million note. After using part of the proceeds to repay some debt, it had $6.2 billion of debt (64% debt/total capital).
The company has maintained a $0.23 quarterly dividend since 2017, giving the company a 5.4% yield. Using adjusted earnings, its payout ratio is 55%. But with Newell already under pressure heading into a less favorable climate, this could result in the board of directors cutting the dividend.
2. FirstEnergy
FirstEnergy (FE 0.74%) is an electric utility servicing Ohio, Pennsylvania, West Virginia, Maryland, New Jersey, and New York. Traditionally, this is a conservative business, but there are issues the company is confronting.
Recently, it announced that it received subpoenas related to an Ohio bill that relaxed renewable energy standards. There are other players, including politicians, caught in this web. It is unclear how or even if FirstEnergy is involved, and these are only allegations. But it does create uncertainty right now.
Turning to results, FirstEnergy's second-quarter revenue was $2.5 billion, flat versus a year ago, while its earnings under U.S. generally accepted accounting principles (GAAP) fell from $0.58 to $0.57.
FirstEnergy CFO Steven Strah stated on the second-quarter earnings call, "...these attributes support an attractive CAGR as well as a sustainable dividend that management aspires to grow..." However, while the company pays a $0.39 quarterly dividend, which is a 5.7% yield, FirstEnergy's payout ratio is 125%, indicating it will need to materially increase earnings going forward to avoid cutting its dividend.
It is also worth noting that FirstEnergy has lowered its dividend in the past. The board of directors slashed the quarterly payout by 35% in 2014, blaming economic conditions.
3. Pitney Bowes
Pitney Bowes (PBI +1.58%) has tried to make up for its postage meter getting squeezed by businesses shifting away from traditional mail in favor of other means. The company has been trying to use acquisitions to push into the digital space.
This hasn't reversed the tide. Diluted earnings per share from continuing operations have gone from $1.62 in 2014 down to $0.23 last year. In response to its faltering profitability, Pitney Bowes slashed its quarterly dividend in 2019 from around $0.19 to $0.05.
Even at the reduced rate, the stock has a 7% dividend yield. This seems tempting, but you shouldn't jump in. Last year, its payout ratio was nearly 90%, which doesn't appear sustainable. With Pitney Bowes' first-quarter adjusted earnings falling to $0.05 from $0.11, it would not surprise me if the company decided to reduce its dividend again.
True, I have speculated that these companies are candidates to cut their dividends, but as they are confronting challenges from before the pandemic struck, it requires a big leap of faith that they can quickly turn things around.
