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These Stocks Should Cut Their Dividends
11/24/2012 5:04:00 PM
In an environment where inflation hovers around 2.2 percent and 10-year Treasuries yield an anemic 1.6 percent, investors have essentially been chased into dividend stocks and other yield-bearing fare. In large part, today's low interest rates explain the stellar inflows gained by dividend ETFs this year.
Thirty-two dividend ETFs tracked by Dorsey Wright & Associates collectively grew assets by 40 percent through the end of the third quarter compared to asset growth of 23 percent for all ETFs, according to data provided by the firm .
With dividends soaring in popularity (and size), investors need to remember a crucial factor about the world of payout stocks: There is a big difference between a dividend stock and a stock that pays a dividend, but the line between the two is too often blurred. That can lead to disappointment for investors.
Using stocks that many investors are familiar with, an example of a dividend stock is Procter & Gamble (NYSE: PG ). The Dow component and world's largest consumer staples make has raised its dividend every year for more than five decades. Other blue-chip firms such as Coca-Cola (NYSE: KO ), Exxon Mobil (NYSE: XOM ) and PepsiCo (NYSE: PEP ) have shown similar commitment to their dividends and are in the midst of multi-decade dividend increase streaks.
These are dividend stocks. The companies themselves know as much and, as a result, they continue to reward shareholders year in and year out. On the other hand, a stock that pays a dividend is just that: A stock with a dividend. Some of these companies have shown little to no commitment to their respective payouts and, in some cases, would be best served by cutting, eliminating or suspending the payout. Here are some examples of companies that pay dividends that might find better uses for the cash.
Chesapeake Energy (NYSE: CHK ) It is no secret that the second-largest U.S. natural gas production has been facing a major cash crunch. The Oklahoma-based company has been parting with some prime assets to raise cash and with $11.6 billion in asset sales already announced , the company is 85 percent of the way to its 2012 goal of $13 billion to $14 billion in asset sales.
Problem is Chesapeake's production numbers are bound to take a beating as the result of these asset sales and the company still faces a 2013 funding gap. The company pays a dividend, which has grown impressively over the past decade, but at 35 cents per share per year, this is no dividend stock.
However, based on 644.56 million shares outstanding , Chesapeake could save nearly $226 million by eliminating its dividend. In the case of Chesapeake, a penny saved is a penny earned.
Hewlett-Packard (NYSE: HPQ ) The technology sector is now the largest dividend-paying industry group in the U.S. and with so much cash sitting on the balance sheets of Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ) and friends, analysts expect the tech space to offer the best dividend growth in the coming years as well.
Just do not expect embattled Hewlett-Packard to take part in that dividend growth. It should not. Yes, HP is pays a dividend. And yes, the company boosted that dividend by 50 percent last year and by another 10 percent earlier this year. However, prior to last year's dividend hike, HP had not raised its payout since 1998.
Now, HP faces an $8.8 billion writedown tied to the acuisition of software maker Autonomy. To some, HP's yield of 4.4 percent probably looks alluring. Not so fast. Based on $1.96 billion shares outstanding , HP's current annual dividend obligation is nearly $1.4 billion. In other words, the Autonomy writedown is equal to just over six years worth of HP dividend payments.
Petrobras (NYSE: PBR ) In some circumstances, owning state-controlled enterprises as dividend plays makes sense. After all, governments are greedy and as the largest shareholders in these companies, they want dividends, too. Just this year, politicians in China, India and Russia have moved to force state-run firms to start paying out greater percentages of corporate profits in the form of dividends.
Do not expect that to happen with controversial Petrobras. Already on the hot seat for for declining profits and production , Petrobras cannot compete with its global integrated oil rivals when it comes to dividends and yield.
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