You Should Reconsider These High Yield Dividend Stocks
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dividend stocks have high sentimental value attached to them. These stocks come with an added advantage of regular income with opportunity of growth in price. Continuing my quest to identify dividend stocks, I took the below mentioned three stocks into my analysis, which have been recognized in the past by investors as high yield dividend stocks. The idea is to test whether these stocks will maintain the same level of dividend yield or not.
Source: Yahoo Finance
Usually, while identifying an investing opportunity I weigh the stock on two parameters. First, whether the business model is in shape and secondly, how the stock is going to perform in the long term landscape. Let’s analyse how these stocks fit on these standards.
Pitney Bowes Incorporated
Since January, 2013 the stock is on a roll, the stock price has jumped almost 25% and the dividend yield has reached 11.1%. The stock's dividend yield even surpassed the S&P 500 Index's average rate of 2.2%. So far, it has been a decent year for Pitney Bowes, but what concerns me is the deficit of free cash flow for this company. The company dedicates half of its free cash flow in paying dividends where as it has long-term debt of ~$4 billion on its balance sheet. And, as a result of the continuous decline in revenue of its small and medium mailing segment (more than half of Pitney's revenue) Fitch has downgraded its ratings for the company and its subsidiary.
The dicey cash-flow
The decline could affect the cash flow ability of the company in the future. In 4Q12 the segment's revenue was down by ~3%; mainly due to weakness seen in sales from the North American mailing business. Along with that, according to the company's guidance, the free cash flow in 2013 is expected to be around $600 million below last year's $764 million. So, at some point in the future, in order to improve its credit rating, Pitney will have to start diverting its funds towards debt repayment. Additionally, some good mergers or acquisitions are needed to improve the company's profitability. This will eventually bring down the dividend payment capacity of Pitney, there upon reducing the sacrosanct yield. Hence, until any more clarity is given on the usage of the future cash flow I would rate the stock as a hold.
When you expect a loss, anything but a loss is reason to cheer. At least that's what Best Buy is going through in past couple of days. The company presented flat comp sales in its domestic segment for the nine-week long holiday season. Although flat comps are not an attractive figure, it turns lucrative once investors are expecting a decrease in overall sales. Considering the slow holiday season, the decline in same-store-sales (SSS) was expected. Now for those who are in the stock for its strong dividend declaration capability, near future may be a bit disappointing. Along with the flat comp, the company reduced the estimated free cash flow for last year. It now stands at ~$500 million, it is to be noted that this is the second revision from the company. Originally, Best Buy expected free cash flow at around $1.25 billion. Current reduction is fully dedicated to accounts payables driven by timing of receipt of inventory. It is further affected by a shift in the sales mix to higher velocity categories that carry shorter payment terms.
What about the buyout of Best Buy?
The more than expected comp sale has one more likely advantage. Richard Schulze, Best Buy's founder was given a second extension to find a private investment firm for the company's buyout. The deadline for Richard to get a private buyer falls at the end of February, 2013. The flat SSS might just be the push needed to the earlier lack of interest among investment firms. Additionally, the company has planned to cut its losses by closing 15 stores in Canada. Although it does not have a major effect on the stock, it shows the company's baby steps towards the right strategic direction of cost cutting. But until I hear any confirmed news about the buyback I stick to a hold rating for the stock.
Sonoco Products Company
High dividend yield is definitely a driving factor, but consistency also matters and Sonoco has pioneered in consistency. This was the 351st consecutive quarter in which the company declared dividend. It is an achievement in itself that the company has not missed a single payment in last 88 years. The recent declaration of quarterly dividend came along with the 4Q12 and full year's results. Net sales of the company rose by ~4% year-over-year. This rise was dedicated to the acquisition of Tegrant and to the high volumes. The increase was partially offset by the lower selling price though. To correct the price factor the company recently announced a rise in prices of all uncoated recycled paperboards and paperboard tubes and cores.
The rosy future
Moving on to a key tenet in the company's long-term strategy was changing the portfolio mix. Over the last several years, Sonoco made efforts to change its product mix to emphasize on the more profitable industrial end market. The initiatives paid-off and the current mix has more of industrial influence than consumer. Going forward, the focus appears to be on maximizing investor returns of existing assets by optimizing low growth businesses. Additionally, the company can assess the profitability of investment in emerging segments such as Rigid Paper and Closure segments that have better prospects.
Considering all these factors I am optimistic about the company's guidance for 2013 about free cash flow of ~$130 million. Since no major acquisition or merger is expected in the foreseeable future the funds should be used for dividend distribution or share buyback, both of which provide a win-win situation for the shareholders. However, despite the achievable cash flow I feel that some headwinds will be faced by the stock in the form of rising prices of its products. It will improve the profitability, but correspondingly the volumes can suffer. However, the dividend policy and its long-term strategies offset these headwinds. Looking at all these factors I feel that even with the slight uncertainties, this stock is worth a buy.
I think Pitney with its degraded credit rating, outstanding debt and weakness in revenue will not hold up the streak of good dividend payments for long. Best Buy's situation is also not too promising. The sales were flat for the holiday season and the buyout deal is looking hazy. The stock for me is a hold until more clarity on the buyout is obtained. On the other hand, for the consistent performer Sonoco, the future cash flow is achievable with its changing portfolio mix. I'll rate the stock as a Buy.
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