High-yield dividend stocks are attractive to income investors looking for ways to turn their portfolios into cash, but they can also be risky if their fundamentals can't support their payouts. Recently, a couple of energy stocks made the tough decision to reduce their dividends, and there are other companies in the space that could join them in the near future. Read on to learn more about these stocks and the challenges they face.
The Noble thing to do for shareholders
The offshore drilling industry has gotten hit especially hard by the drop in crude oil prices, as high costs make it less economically viable for exploration and production companies to take on expensive offshore projects. Noble Corp. (NYSE:NE) had managed to sustain a dividend yield of more than 10% for a lot longer than many investors had expected, but the company finally reduced its payout by 60% in late October. The company will now pay $0.15 per share quarterly, which still amounts to a respectable yield in excess of 4.5%.
Noble CEO David Williams said that the move "appropriately addresses the prevailing industry uncertainty with an eye on preservation of liquidity while maintaining what we believe is a meaningful and sustainable allocation of cash to our shareholders." By increasing free cash flow by more than $220 million, Noble thinks that the dividend cut will help give it the strategic flexibility to take advantage of rapidly changing conditions in the industry, and in the long run, that could be more beneficial to shareholders than a slightly higher dividend payout.
Marathon Oil pulls the trigger
Among producers, the drop in crude oil has had a direct impact on results. After months of speculation, Marathon Oil (NYSE:MRO) finally bit the bullet in late October, slashing its payout by more than 80% to just $0.05 per share. With the move, Marathon's yield falls to just over 1% from its previous payout yield of nearly 5%.
Marathon's justifications were similar to what Noble gave, with Marathon CEO Lee Tillman pointing to "our priority of maintaining a strong balance sheet through the cycle," and "additional capital flexibility to support growth from our deep inventory of investment opportunities in the U.S. resource plays when commodity prices improve." By freeing up $425 million in free cash flow annually, Marathon expects that it should be able to get through low commodity prices even if they last longer than most currently expect.
Could Atwood Oceanics be next?
Some oil investors fear that offshore specialist Atwood Oceanics (NYSE:ATW) might be the next victim of the poor energy environment. Its $1 per-share annual dividend rate works out to more than a 6% yield, and Atwood has seen some of the same impacts on its backlog and vessel fleet as Noble and some of its other rivals.
Atwood's latest quarterly report didn't include a definitive payout reduction, although it left the door open for one to occur in the future. CEO Robert Saltiel said that he wouldn't make any dividend announcements in Atwood's post-earnings conference call, but he did acknowledge that "we do recognize that the opportunity cost of paying a dividend has risen, given potential alternative uses of this cash in today's uncertain market." At least in some investors' eyes, that signals a likely cut that could occur soon, and increasingly, dividends are becoming harder to find throughout the energy industry.
Dividend cuts are always a risk, especially among companies whose stocks have high dividend yields. The best defense is to be aware of potential issues before a cut happens, and to position yourself to be comfortable with whatever risk level you choose to take on in your investment portfolio.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Atwood Oceanics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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