Consumers have an insatiable appetite for new and better
products and services, and they tend to reward the companies that
fulfill their desires.
However, shifting consumer preferences can erode brand loyalty at
even the best-loved companies. When this happens, expenses are
slashed and dividends are cut as the formerly high-flying company
struggles to remain relevant in the ever-changing consumer
Once the dividends start to be cut,yield investorswill start to
dump thestock , sending share prices downward. The key to
avoiding these "dividend trap"stocks is to look for a weakening
fundamental and technical situation when thedividend yield is
staying steady or climbing.
Here are two stocks that may become "dividend traps" due to
the changing consumer landscape.
Garmin (Nasdaq: GRMN)
This manufacturer and marketer of GPS equipment pays a hefty
dividend yield of 5%. Generally, this would be a positive, but in
this instance, it signals trouble.
The positive news is that the company'snet income increased to
just under $90 million during its first quarter. This is up from
just under $87 million ayear ago, representing an increase of
about a penny per share.
However,revenue plunged nearly 31% from the previous quarter
and was down more than 4%year over year .
Again on the positive side, revenue from Garmin's aviation and
marine segments grew solidly from the previous quarter. However,
revenue from the auto and mobile segment plunged more than 42%
during the same time, and the fitness and outdoor segment also
experienced substantial revenue declines.
If you own a smartphone, then you understand Garmin's problem.
Smartphones already have GPS software installed, which means
consumers no longer need to buy GPS units for personal use. This
makes a company like Garmin irrelevant in all but the high-end
GPS segments, like aviation and marine applications.
In the technical picture, the share price has bounced from a
double-bottom low in the $32 range but has hitresistance at
Darden Restaurants (
If you have dined at an Olive Garden, LongHorn Steakhouse orRed
Lobster, then you are familiar with Darden Restaurants. It is the
world's largest full-service restaurant operator, with more than
2,000 locations and $8 billion in annualsales . Although it has
an impressive dividend yield close to 4%, this company is
starting to exhibit signs that its time in the sun is over.
Dilutednet earnings for the third quarter of Darden's fiscal
2013 plunged 18% from the same quarter last year. Overall sales
increased slightly by 4.6% from the same quarter last year, but
U.S. same-restaurant sales were down 1.6%, 4.1% and 6.6% for
LongHorn Steakhouse, Olive Garden and Red Lobster,
The slippage insame-store sales is a likely signal of
restaurant fatigue among consumers. Consumers can patronize the
same restaurant for only so long before tiring of it. As I've
written before, investors can see this happening with
Chipotle Mexican Grill (
Technically,shares have soared higher this year, but the
momentum appears to be slowing in the $53 range.
Risks to Consider:
Although the signs are clear that Darden and Garmin have run
theirbullish course and will soon start to decline, no one knows
for certain what the future holds. If you sell, you risk
potential furtherupside and dividendappreciation . Shorting these
shares can also expose your portfolio to losses should the stock
keep climbing. A dividend cut remains speculative. Always use
stops and properly diversify wheninvesting .
Action to Take -->
My 18-month target prices are $44 on Darden Restaurants and $20
on Garmin. Neither company has cut its dividends, but their
performance and technical pictures signal possible cuts in the
next 18 months.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.