News of a dividend cut is not something any investor wants to hear. The stock can plummet afterward, and the dividend income will be a fraction of what it was before. If a company deploys a cut, it'll want to be confident it gets it right to avoid having to do so again in the near future. That's why cuts normally are steep and aren't just modest reductions. They happen when things have gone incredibly badly for their respective businesses.
That also means, however, that investors may be able to spot warning signs in advance. There are three dividend stocks that I believe may be headed for trouble, and which I predict will slash their payouts within the next three years: Kraft Heinz (KHC -1.12%), Western Union (WU +0.28%), and Nike (NKE -1.88%). Here's why I think the writing is on the wall for these stocks and their payouts.
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Kraft Heinz
Kraft and Heinz may be iconic food brands, but the business that owns them just hasn't been doing that well. Revenue declined last year, as it did the year before. There are question marks about its future growth, and it recently contemplated breaking up its business, only to end up halting those plans after reports that Berkshire Hathaway, a major shareholder, was reportedly contemplating dumping the stock -- perhaps due to the possible split.
There are clear challenges for Kraft, and while its new CEO, Steve Cahillane, believes the issues are fixable, investors should tread cautiously. If Kraft is unable to return to growth and improve its financial performance, it may only be a matter of time before a dividend cut occurs.
NASDAQ: KHC
Key Data Points
Kraft cut its dividend in 2019, but even now, with profits shrinking and so many question marks hanging over the business, the current payout might not last much longer. I'd be surprised if the food company doesn't slash the dividend again in the near future.
Western Union
In some cases, just looking at the size of a yield can make it fairly obvious that there's trouble brewing. Financial services company Western Union pays a dividend that yields more than 13%. If the market thought that the payout was sustainable, it might be the hottest dividend stock to own. Instead, it's down 25% this year and by nearly 70% over a five-year period.
NYSE: WU
Key Data Points
In its most recent quarter, which ended on June 30, Western Union's revenue was down just 1%, but its operating income declined a mammoth 31%. Remarkably, despite its struggles and such a high yield, the stock's payout ratio is only around 76%.
However, with further earnings deterioration potentially on the horizon, the ratio is likely to rise higher. Between rising competition and adverse macroeconomic and trade issues affecting its business, it's difficult to see a path for things to improve for Western Union anytime soon. While the payout is sustainable for now, a dividend cut may be inevitable down the road.
Nike
Apparel giant Nike is facing some challenging market conditions. It's in the midst of a turnaround, and its dividend may be a necessary casualty as the business looks to strengthen its growth prospects. Generating any sort of sales growth has been a challenge.
In the company's most recent fiscal year, which ended on May 31, revenue was flat, and net income declined by 3%, and those numbers would have been even worse if not for tariff refunds.
NYSE: NKE
Key Data Points
Nike's been in bad shape for a while, with its stock down more than 75% over the past five years. As a result of the decline, the stock's yield has risen to nearly 4%, which may not seem unsustainable, but that's far higher than normal. The company hasn't shown enough progress in its turnaround to prove it's on the right path. Meanwhile, its free cash flow over the trailing 12 months has totaled $2.2 billion -- less than the $2.4 billion it's paid out in dividends.
Unless things improve drastically for Nike within the next three years, I fully expect it to cut its dividend.
