In the past six years, profits have been steadily dropping at
Nutrisystem (Nasdaq: NTRI)
. Per-share profits of $3 back in 2007 are in the distant past,
and the company is now earning a tenth as much. Still,
Nutrisystem stands by its annualdividend , which is on track to
be 70 cents a share for the fifth straightyear .
The fact that thisstock sports adividend yield of close to 10%
is why investors continue to give this company a fresh look. But
it's quite likely that Nutrisystem's run of 70-cent-a-share
dividendswill eventually come to an end. Without a dividend in
place, this stock could tumble to fresh multi-year lows.
How do we know that Nutrisystem is headed for a dividend cut?
Because thebalance sheet has been bled dry. Nutrisystem had $57
million incash at the end of 2011. That figure fell to $20
million a year later -- and if Nutrisystem maintains its
dividend, that sum will soon evaporate.
This isn't to suggest that Nutrisystem is in deep trouble.CEO
Dawn Zier, who took the reins of the company in late 2012, has
outlined a series of steps to turn operations around that will
hinge on business streamlining, product innovation and improved
Those things costmoney , however, and the company will need to
take steps to conserve cash wherever possible. So a dividend cut
(or outright elimination) could come as soon as the next quarter,
as Zier realizes how crucial it is to retain cash.
The Dividend Trap
Nutrisystem is one of many companies that fall into a trap of
sticking by a dividend -- even when reality dictates a dividend
cut. You canspot these firms simply by comparing the dividend
streams to profits. If the dividend is higher thanearnings per
) for an extended period, then something will have to change.
Take wireless communications firm
NTELOS Holdings (Nasdaq: NTLS)
as another example. In five of the past six years, the dividend
has been higher thanEPS . This company'sEBITDA (earnings before
interest,taxes ,depreciation andamortization ) margins peaked at
37% in 2008 and have slid to a recent 28%. In an industry where
pricing pressures are bound to get only stronger, margins are
likely to keep compressing, and sooner rather than later, that
dividend will need to be cut.
Yet here's the key difference: Nutrisystem will probably need to
get rid of its dividend, whereas NTELOS really only needs to
reduce its dividend. And if you can get a handle on what the
future dividend payments will be, you might be able to spot a
For example, in the case of NTELOS, the current dividend of
$1.68 a share equates to a 12%yield . Perhaps the dividend only
needs to be cut to $1. That would work out to be a 7.3% yield,
which could serve as acatalyst for renewed interest in this
stock. (Other telecom service providers typically have yields in
the 5% to 6% range, which is why NTELOS would be appealing with a
safer yet higher-yielding stock -- once that dividend cut takes
The Relief Rally
Roughly a year ago, I took a look at a pair of companies that
sported such absurdly high dividend yields that I had to wonder
whether the dividend was going to be eliminated.
Propane distribution firm
had seen itsshares slump badly as many assumed the dividend would
be eliminated. I argued that investors would be relieved to learn
that the dividend would be only partially cut. Sure enough,
that's what happened, and shares staged a nice relief rally.
The other stock I mentioned in that article,
Two HarborsInvestments (
, has also tacked on a solid 25%gain since then as investors have
come to see that the company can maintain a dividend above $1 a
share for the foreseeable future.
Risks to Consider:
It's unwise to short a stock in anticipation of a dividend
elimination. Companies can hang on to their dividend longer than
you have the stomach to short it.
Action to Take -->
The rules here are fairly straightforward. Don't hold on to any
stock that looks to be on the cusp of an outright elimination of
its dividend. Nutrisystem may actually make for a goodinvestment
after the dividend is gone -- but you may as well wait for that
inevitable dividend cut first.
In addition, you can assess almost any high-yielding stock to
try to gauge what kind of cut may be coming. If the cut will
still produce a dividend that produces a respectable yield, then
you may be positioned for niceupside , as the examples of Inergy
and Two Harbors show.
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