Be Wary of These Stocks With Weak Dividend Growth

Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When it comes to how I construct my portfolio, I seek companies that increase their dividends over time. As a dividend growth investor, I want to avoid companies that are not growing dividends at a rate above inflation. I also want to avoid those that are slowing down dividend growth.

Let's look at some companies that I would be cautious investing in long term. We will inspect valuation metrics, as well as the direction the dividend is heading in. Finally, we will look at why the dividend could remain in trouble moving forward. Remember - it is OK to have a stagnant dividend if you are only concerned with income. I simply require dividend growth, as I look to invest for the long term.

Is it time to hang up on this stock?

AT&T (NYSE: T)

AT&T is an American telecommunications company. It provides land line and mobile phone services, internet, and television services.

<img alt="" src="http://g.fool.com/editorial/images/58205/t_large.png" />

source: Yahoo Finance

  • P/E: 27.70
  • P/CF: 7.4
  • Dividend Yield on Current Prices: 5.00%
  • 5 Year DGR: 4.4%
  • 3 Year DGR: 2.4%
  • 1 Year DGR: 2.3%

Dividend headwinds

AT&T has some challenges to overcome in the short to medium term. This can be summarized in a couple ways. The first aspect of this challenge is AT&T's need to adjust to a shift in consumer technology demand. Consumers are slowly shifting away from land lines and towards mobile phone services. This has caused a steady decline in AT&T's land line revenues.

Secondly, AT&T is involved in a capital intensive industry. It requires massive capital investments in order to build a network of telecom infrastructure. Verizon recently warned that the growth of its wireless segment has caused strain on its data network. An increase in estimated capital requirements to fortify its network were announced. This effect will surely carry over to AT&T before long.

This will potentially take away from AT&T's ability to grow its dividend. As you can see, the dividend growth rate has been below the historical inflation rate over the last 3 years.

This stock isn't very sweet

Tootsie Roll Industries (NYSE: TR)

Tootsie Roll is an American candy maker. Known for its world famous Tootsie Roll, it sells its products across the world.

<img alt="" src="http://g.fool.com/editorial/images/58205/tr_large.png" />

source: Yahoo Finance

  • P/E: 39.60
  • P/CF: 17.9
  • Dividend Yield on Current Prices: 0.90%
  • 5 Year DGR: 2.8%
  • 3 Year DGR: 2.7%
  • 1 Year DGR: 2.3%

Dividend headwinds

Tootsie Roll Industries is what you would call "stagnant." It has been a very conservatively run company. This low growth (2% sales growth) has left it in a position where it may be tough to increase its dividend. It pays out almost all of its earnings (91%), and the cumulative salary of upper management represents 1/3 of its net income!

How does a company growing this slowly become so expensively valued? Management is aging, and the safe bet is that investors are hoping for a management change or acquisition. The optimistic approach on this, is that Tootsie Roll Industries has a GREAT looking balance sheet. With almost no debt, and roughly $100 million on hand.

Until a company shakeup occurs, I wouldn't count on the dividend going anywhere anytime soon. The growth just isn't there right now.

Is it time to take out the trash?

Waste Management (NYSE: WM)

Waste Management is an American company that serves North America through the disposal and recycling of waste material.

<img alt="" src="http://g.fool.com/editorial/images/58205/wm_large.png" />

source: Yahoo Finance

  • P/E: 24.2
  • P/CF: 9.4
  • Dividend Yield on Current Prices: 3.40%
  • 5 Year DGR: 8.1%
  • 3 Year DGR: 7.0%
  • 1 Year DGR: 4.4%

Dividend headwinds

A glance at the fundamentals of Waste Management may leave you troubled. Earnings per share are declining instead of increasing. With a debt to equity ratio of 1.6, it is currently carrying more liabilities than assets. This pressure on the balance sheet is putting the squeeze on the dividend. Its payout has crept up, and now sits at 81.6% of earnings.

How fast could Waste Management right the ship? It is hard to say. The nature of its business model doesn't scream "growth." Its five year sales growth rate is 0.5%, essentially flat. However, Waste Management is still the "best of breed" in its sector. A restructuring to cut costs by management could provide a spark, if it were to happen.

Because this is not known to be on the horizon, I would advise against speculating. Until it proves itself "changed," and the fundamentals/balance sheet improve - I would steer clear of this stock's dividend.

The bottom line

A dividend needs to be growing to be in a well run dividend growth portfolio. These stocks are not necessarily bad companies. However, each faces some challenges that must be overcome. Because of the known risks to each company's dividend growth, I will not be putting these stocks in my dividend growth portfolio any time soon.

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Justin Pope has no position in any stocks mentioned. The Motley Fool recommends Waste Management. The Motley Fool owns shares of Waste Management. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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