Trick (Not Treat) Yields
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are some dividends that look so tasty that you're tempted to grab them from the weird neighbor lady's Halloween cauldron..the biggest, most colorful candy. Although you know better or you're a little inexperienced at the game you grab it and run. Then, it's getting late, most of the houses are turning off their porch lights since they've run out of candy, so off to home. Of course, this big amazing looking piece of candy is the first one you have to scarf down before Mom puts away the rest so you don't get sick.
The chocolate looks kind of white all over but you don't care so you eat the whole thing. You shouldn't have grabbed it in the first place and when you opened it up you had your second clue but it was so big! Now you're sick to your stomach.
That's exactly how you may feel after buying a stock with a tempting dividend, only to find the share price has dropped by the amount of your dividend or more. Or, in an even worse case scenario, they've cut the dividend and now everyone wants out of the stock.
Several companies are offering suspiciously high yields and one is Roundys Parent Company (NYSE: RNDY). I think the supermarket sector ,with the exception of Whole Foods Market, is a difficult business model at best, with margins as thin as the garlic the Goodfellas guy in prison slices (let's just say it's paper thin). Just how long can they afford to pay a 16.60% yield? They only have 159 stores and 99 pharmacies. Sure, the P/E is 4.70 but that's because the share price dropped from a high of $12.50 to $5.50 just since May. The profit margin is 1.10% and the short interest has grown to 20% as those who already got their last dividend have scuttled away.
American Greetings Corporation (NYSE: AM) pays a 3.50% yield but has had a major move up since a September 25 take private/buyout offer by the Weiss family, including CEO Zev Weiss and COO Jeffrey Weiss, and the company has already formed a special committee to consider the $17.18 per share offer. On September 28, the company reported earnings of a net loss of $0.13 per share with most of the loss attributable to their June acquisition of Clinton Cards including its 400 stores and inventory. The P/E is 48.17. The greeting card industry is going through a sea-change from paper to e-platforms and going private might be the best thing for the company, but buying it for the yield when its future as a publicly traded company is in question may not be the best for you. The next earnings report scheduled on December 21, it may not be publicly traded by that date, considering the speed of the Board's rounding up a committee.
Then there's two telecoms, normally a reliable dividend sector, whose share prices have dropped by more than the percentage of the yield. If you think Roundys is scary then Frontier Communications Corporation (NASDAQ: FTR) is definitely not for you. This rural telecom has an 8.40% yield with a 523% payout ratio. It's down 23.48% over the last year and some of its other numbers are off-putting as well like a growing short interest of 23.10% and a 2.11% profit margin. The 47.40 P/E should put you on high alert, as well. The company has cut its dividends in the not-so-distant past and so its dividend inconsistency gives this yield a high probability of being cut yet again. Finally, CEO Mary Wilderotter was listed as one of the ten worst mid-cap CEO's by Chiefist.com based on their metrics of return on equity, EPS growth, book value and margin expansion.
Windstream Corporation (NASDAQ: WIN) has a 10.50% yield with a 333% payout ratio. It has a 34.50 P/E and the share price is down 20% over 52 weeks. Its short interest isn't quite as high as Frontier's at 11.70%, but it has increased over the prior month. Windstream's profit margin is a little better at 3.10%. The company reports again on November 8.
The last scary dividend stock is Cliff's Natural Resources (NYSE: CLF) now offering a 6.90% yield with a P/E of 5.77. The share price has been halved in one year. Its latest Q3 earnings release on October 24 showed an 85% drop in EPS from a year ago. Obvious and painful puns on cliffs, dropping, plunging, etc. aside, that is a disappointment. Lower prices for iron ore and rising costs cramped both topline and bottomline. The company has had four downgrades in as many months. The global mining and natural resources name does have two advantages over these others: its dividend payout ratio is only 15% and it has a much better profit margin of 14.66%. Its debt load is crushing, however, at $3.88 billion to total cash of $36.30 million.
Look hard at these names and see if they're stale or should just be thrown away. There are much better dividend names out there that are fresh and while their dividends may only be "fun-size" in comparison with these names, at least they're reliable.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of American Greetings. 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.If you have questions about this post or the Fool’s blog network, click here for information.