Sometimes, an amazing dividend is just too tempting to pass up. There's no doubt that investing with an eye toward dividends is a solid way to invest -- but sometimes you need to scratch beyond the surface.
A little over a month ago, I warned about three extremely dangerous dividends. Though I certainly have my fair share of inaccurate predictions, one seems to be playing out. Read below to see why one of the companies I singled out -- Midwestern grocer Roundy's (NYSE: RNDY) -- is taking a big hit today. Read all the way to the end and I'll offer up access to a special free report on some much smarter dividend choices.
What's the deal?
For those who need a quick primer, Roundy's line of Pick 'n Save and Copps supermarkets are mainstays in my native Wisconsin. The company just went public this year, but not in a way that should have investors excited: The company's private owners wanted to unload the grocery chain, but couldn't find a buyer. The solution? Go public.
Well, Roundy's came out with earnings this week, and investors clearly don't like what they see, as the stock is down by as much as 20% today. Here's a quick breakdown of some of the key numbers from the report:
- Sales were actually down 0.3% from the same time last year.
- Earnings per share came in at $0.20, a 51% decrease from the same time last year.
- Same-store sales were down 3.6% from the same time frame last year.
It's also not encouraging that one of the excuses management paraded out was the fact that "customers did not respond as enthusiastically as we had expected to our Monopoly promotion program."
Seriously, Roundy's? You're banking on a Monopoly promotion to make that big of a difference?
That said, the biggest hit to dividend investors came from the company's announcement that it would be cutting its dividend from $0.92 per year to $0.48 -- that's a whopping 48% drop in dividend payments investors can expect. With the cut, Roundy's joins the likes of SUPERVALU (SVU +0.00%) in dividend disappointers in the grocery business.
Is it a buy now?
I've long said that Roundy's chain of Mariano's Fresh Markets in Chicago have something going for them, but they represent a very small portion of Roundy's total store count. The company also has to compete against niche competitors like The Fresh Market (TFM +0.00%) if it wants to continue expanding its footprint of Mariano's-like stores.
Even more telling, let's investigate how expensive the company was pre- and post-earnings, without even looking at the 20% price drop.
|
Date |
Price-to-Earnings |
Dividend Yield |
|---|---|---|
|
Nov. 8 |
4.5 |
17.3% |
|
Nov. 9 |
4.4 |
11.2% |
Sources: SEC filings, Yahoo! Finance.
As you can see, you're actually paying the same relative price today for a company that has a far smaller dividend and shakier outlook than it did just yesterday.
Over the year, the company's free cash flow has virtually evaporated, going from $78 million over the first nine months of 2011 to just $8 million in 2012 -- a change of about 90%. Even with the reduced dividend the company plans on paying out, there's still a question as to its sustainability over the long run.
