Everyone loves a good dividend. It’s like free money arriving in your brokerage account every quarter. And, in theory, the higher the yield the better.
But what if that juicy dividend isn’t sustainable. In most cases a dividend cut in a high yielder means you’ll not only lose the dividend, but the stock may take a nosedive as well. One measure of whether a company can maintain its dividend is cash flow. It’s pretty simple. If cash flow is decreasing, watch that dividend like a hawk.
Much of the retail sector has seen a renaissance of late. Target Corporation (NYSE: TGT) CEO Brian Cornell recently said, “This is the best consumer environment I’ve seen in my career.” But while big retailers like Target are making a comeback, this isn’t true of many small and specialty retailers.
Case in point, Barnes & Noble, Inc. (NYSE: BKS). With the addition of Amazon’s new bricks-and-mortar store, the competition is only getting tougher. Barnes and Noble currently pays a whopping 12% yield. Yet, its net operating cash flow fell 25% from 2016 to 2017, and looks to be continuing the downward trend in 2018. The company holds only $.19 per share in cash, and is closing stores to try to stop the bleeding.
Have you been in one of the new Amazon stores? They’re sleek and sophisticated, and completely connected to the online Amazon experience. My local BKS closed recently in Bethesda, and was quickly replaced with an Amazon store. The future looks bleak for BKS, and the dividend may not be the only thing to go.
Another dividend payer fighting against the current is Pitney Bowes, Inc. (NYSE: PBI). The company’s stock has been cut in half from highs reached earlier this year. The result is the stock now pays a 10.56% dividend.
Cash flow has been falling for several years at the mail and customer information management company. On top of its cash flow issues, Pitney Bowes is also operating under a mountain of debt. Moody’s recently praised the company for selling off a business unit to pay off some of its debt. But that’s not a sound strategy for maintaining dividend payments. Investors may want to stamp this stock out of their portfolios.
Finally, let’s take a look at Stage Stores, Inc. (NYSE: SSI). The company currently sports a yield of 10.15%. The stock managed to move above $3.20 earlier this year, but has fallen back under $2. Stage has managed to lose $60M in the past twelve months, with earnings per share falling over 63% year-over-year in the latest quarter. Net operating cash flow dropped 10% this year.
With a little over $1 per share in cash, the company will be hard pressed to maintain it’s $.20 quarterly payout. The company slightly improved comparable sales last quarter, but they continue to fall. Without a turnaround, it may be necessary to cut the dividend to conserve cash while management rights the boat.
Investors should exercise great caution if they are holding any of these stocks for the dividend payout. Without cash flowing in to support the payouts, a dividend cut could leave you holding the bag when the stock tanks. Never purchase a stock for a juicy dividend without diving under the hood first.
Disclaimer: The author and Spotlight Growth has no positions in any of the stocks mentioned in this article. Nor does either party currently have any relationship, or any other conflicts of interest, with any of the companies mentioned in this article. This content is meant for informational and entertainment purposes only and should not be meant as a recommendation to buy or sell any securities. Please visit a licensed financial representative to determine what investments are right for you.
Article By: Steven Adams