With interest rates now having spent years near their all-time lows, many investors who might prefer safer assets have moved to dividend stocks as a way to generate income from their investments. The problem with this strategy is that it only works if the companies that have been mailing out those dividend checks can afford to keep doing so. Therefore, income investors should probably avoid putting their money into any company that is currently experiencing a financial hardship that might threaten its ability to continue making dividend payments.
We asked our three of our Motley Fool contributors to share their thoughts about dividend-paying stocks that they fear may need to slash payments at some point in the future. These are the companies they highlighted.
Andres Cardenal. Tobacco is a very particular industry. Customers are not only addicts to the product, but they are also remarkably loyal to their favorite brands. This gives an industry giant such as Altria (NYSE:MO), which owns the rights to the Marlboro brand in the U.S., tremendous pricing power. According to Altria's financial reports for 2015, Marlboro holds a dominant 44% of the U.S. market, and Altria's other brands boost its total market share is around 51.4%.
Altria has been committed to rewarding shareholders with dividend payments in the neighborhood of 80% of earnings over the long term. The company raised dividends by a vigorous 8.6% in 2015, from $0.52 to $0.565 quarterly. Total dividends over the year amounted to $4.2 billion, and the dividend yield stands at 3.7% versus current prices. Considering all these variables, there is no reason to expect Altria to cut dividends in the short term.
However, the long-term picture looks much more uncertain. The smoking rate among adults in the U.S. dropped from nearly 21% in 2005 to approximately 17% in 2014, and there is no reason to expect a reversal in the trend. Tobacco consumption will most probably continue declining, and Altria's payout ratio is already quite high. For this reason, it's not unreasonable to expect a dividend cut from Altria in the future.
Brian Feroldi: When a stock offers a dividend yield that is far above the market average, that tends to be a warning sign that a cut could be coming. One company with an extremely high yield right now is BHP Billiton (NYSE:BHP). The stock currently yields nearly 11%, which might be the market's way of telling investors that its dividend is in danger.
There's good reason to believe that could be the case, as the Australian mining conglomerate derives its revenue from producing iron ore, metallurgical coal, copper, and oil. Unfortunately, the prices of all of these commodities have been tanking for over a year, which is making it hard for the company to keep the profits flowing.
If that situation wasn't rough enough, BHP is in some hot water right now due to its involvement in causing an environmental disaster in Brazil. Two dams holding waste at the company's Samarco mine -- which it owns in partnership with Vale (NYSE:VALE) -- ruptured in early November, causing huge destruction, at least 12 deaths, and poisoning hundreds of miles of one of Brazil’s most important rivers, the Rio Doce. The Brazilian government is holding BHP and Vale directly responsible for the disaster, and has announced plans to sue. The government is demanding roughly $5.2 billion in damages to help pay for the cleanup, and it has even gone so far as to freeze both companies' Brazilian assets to ensure it will eventually be able to pay.
Naturally, the combination of these situations has worried the ratings agencies, which recently downgraded the credit rating of the company's debt. The also have issued warnings of further downgrades if the company doesn't take action. Add it all up, and the company is facing some serious pressure to cut its sizable dividend payout right now.
Don't let BHP's near 11% yield fool you. This company is in rough shape, and dividend-focused investors should probably look elsewhere.
Don't get me wrong, Mattel reported better-than-expected fourth-quarter results earlier this month, which surprised a lot of people, myself included. Global sales grew 7% on a constant currency basis, with Barbie sales breaking a long-running downtrend with constant currency sales growth of 8%. Fisher-Price sales were also strong, up 13%.
But, the problems for Mattel are threefold. First, it's lacking a sustainable hit. For a while, its winner was American Girl dolls and accessories; however, that ship appears to have sailed. American Girl brand sales dropped 14% on a constant currency basis in Q4. Mattel just doesn't have a hit on the horizon that suggests it's on the verge of strong growth.
Secondly, its push into emerging markets is coming at a terrible time, when Asian growth appears to be slowing and Europe's spending habits remain constrained. It's bad enough that currency translation is superficially hurting its top- and bottom-line results, but it's also dealing with an operational slowdown in demand. Let's not forget that for the full-year worldwide sales rose by just 3%, and Barbie sales actually dropped by 1%, on a constant currency basis.
Lastly -- and most importantly for income investors -- Mattel's payout ratio isn't sustainable. It's paying out $1.52 annually when it's on pace to record earnings per share of just $1.38 for fiscal 2016. All the while, it's been working with a declining amount of cash on hand and is sporting more than $2.1 billion in debt. In my book, that's a recipe for a substantial dividend cut, regardless of what the company's Q4 results showed.
Andrés Cardenal has no position in any stocks mentioned. Brian Feroldi has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. 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.