Is Best Buy’s Dividend in Danger? (BBY)

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Best Buy Co.,Inc. ( BBY ) has been increasing their dividend payouts for the last three years, but with weakening earnings and declining cash flow, will BBY be able to continue its dividend trend?

Earnings Slipping

With the holidays right around the corner, electronics retailer Best Buy reported yet another disappointing quarter on Tuesday. The company reported a third quarter loss of $10 million, or -3 cents per share. Last year, BBY reported earnings of $156 million, or 42 cents per share. Adjusted net income came in at 3 cents per share, nowhere close to analysts' 12 cent expectation.

Third quarter revenue came in at $10.75 billion, declining 4% from last year's revenue of $11.15 billion, but narrowly beating analysts estimates of $10.73 billion.

Tough Product Mix

As the company reconstructs its organization under new CEO Hubert Joly, BBY sees even more pressures from weak product cycle in electronics, increased competition, and higher costs.

Best Buy has had trouble with product life cycles, and not being able to adapt to them in a retail atmosphere. They are also unable to compete with online retailers like Amazon ( AMZN ) with its current business model. Additionally, BBY has been faced with increased selling and administrative costs, making it even harder to compete.

The company has seen an increase in demand for products including mobile phones, appliances, and tablets. However, the number of consumers purchasing notebook computers, gaming products, and TV's has been rapidly declining.

In store sales for the quarter declined by 4.7%, but online sales increased 10%. Although BBY has been seeing major declines in many segments, they saw a 32% increase in mobile phone sales.

A Troubling Share Price Trend

The stock is currently down 48% from this time last year, and down 74% from five years ago. From the company's 2013 guidance, it does not look like the stock will do much increasing anytime soon. BBY originally predicted their fiscal 2013 free cash flow to be in the range of $1.25 billion to $1.5 billion. This estimate has since been lowered to a range of $850 million to $1.05 billion.

With all of this decline, it is making some investors wonder: with a dividend yield now around 5%, is BBY's dividend payout in danger?

Dividend Not Built to Last

Despite falling profit, and issues with its business model, BBY has increased their dividend for three straight years. Although as of now, there is no way to know for sure if or when BBY's dividend will be cut, it is possible that with the company's fourth quarter earnings report, there may be a potential cut in dividend payouts.

It is hard to determine just how much the possible dividend cut could be. Although BBY still generates enough cash to cover its dividend obligations, its sales have been falling for years, and they may not be able to afford a high dividend yield much longer.

White Knight Potential

Best Buy founder and former CEO Richard Schulze attempted to buy out BBY for a price of $8.8 billion in August. During this attempted acquisition, Schulze offered to pay shareholders $24 to $26 per share for their owned shares. Thankfully for his sake, the company rebuffed his offer - the shares are now trading around $12.

Given the stock's big pullback, it's possible Schulze could attempt another takeover of Best Buy. If BBY were taken private, some shareholders would get lucky with a buyout (depending of course on the takeover price and the level they bough in at). However, BBY should not be considered a worthy dividend investment.

The Bottom Line

Best Buy's stock has been declining for years, and is unable to keep up with the ever-changing electronics industry. Although it is not certain, there is only a minimal chance that this company will recover anytime in the near future. It is possible that shareholders could get lucky if the company is bought out, but the company should not be considered a good dividend investment. It is very possible that dividends could be cut in the next quarter - or next year at the latest.

Best Buy Co., Inc.( BBY ) is not recommended at this time, holding a DARS™ Rating of 2.9 out of 5 stars.

Be sure to visit our complete recommended list of the Best Dividend Stocks , as well as a detailed explanation of our ratings system here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Stocks

Referenced Stocks: AMZN , BBY

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As of 4/24/2014, 09:48 AM