Dividends are an investor’s best friend. Not only do the payouts provide many investors with some much-needed income, but they also keep the management teams of companies focused on efficiency and profitability. Although some dividends have a lot of upside potential, not all dividends are so blessed or even guaranteed to last at all, and one of the first signs of potential trouble is a worrisome payout ratio.
In this article, we’ll examine five companies with somewhat high payout ratios that investors should look at with caution in terms of their sustainability. Those companies are Mattel, Inc. (NASDAQ:MAT), Telefonica S.A. (ADR) (NYSE:TEF), Royal Dutch Shell plc (ADR)(NYSE:RDS.A), Staples, Inc. (NASDAQ:SPLS), and Seagate Technology PLC (NASDAQ:STX). For those interested in further reading related to some of the stocks in this article, be sure check out the 11 Most Profitable Computer-Based Businesses to Start.
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Telefonica S.A. (ADR) (NYSE:TEF)
– Number of Hedge Fund Shareholders (as of June 30): 6
– Total Value of Hedge Funds’ Holdings (as of June 30): $3.74 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): <0.01%
With an annual dividend of €0.75 per share (€0.35 of which is issued in the form of a scrip dividend), Telefonica S.A. (ADR) (NYSE:TEF) seems like an attractive stock, with a yield of nearly 9% on its NYSE shares, which does not even include the scrip dividend payment (which is in the form of newly-issued shares), particularly given the fact that the company operates in the telecom sector and is reasonably diversified. Nevertheless, there are some reasons to look further into the company before investing. According to Finviz, analysts only expect the company to earn $0.83 per share next year, a number which, depending on the currency exchange rate, would barely cover its dividend distribution. Not many hedge funds own the stock either, as of the 749 hedge funds that we track which filed 13Fs for the June quarter, just six owned $3.74 million worth of Telefonica’s ADRs at the end of June, though it should be noted that hedge funds are generally underweight ADRs.
Seagate Technology PLC (NASDAQ:STX)
– Number of Hedge Fund Shareholders (as of June 30): 23
– Total Value of Hedge Funds’ Holdings (as of June 30): $563.91 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 7.80%
With a current dividend distribution per ordinary share of $0.63 every quarter, Seagate Technology PLC (NASDAQ:STX) sports an attractive dividend yield of over 7.5%, or greater than four-times the current ten-year Treasury yield. If an investor looked at Yahoo Finance’s payout ratio metric for Seagate, they would see a ratio of 296.34%, a worrisome number for just about any company. Fortunately, Seagate’s forward numbers are anticipated to be a lot better. Analysts expect the company to earn $3.73 per share next year, which would be more than enough to cover the current annual dividend cost of $2.52 per share. However, its management will need to execute well for the dividend to remain safe.
Head to the next page for a discussion of three more companies with worrisome payout ratios.
Staples, Inc. (NASDAQ:SPLS)
– Number of Hedge Fund Shareholders (as of June 30): 33
– Total Value of Hedge Funds’ Holdings (as of June 30): $726.37 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 13.00%
Given the competition from Amazon.com, Inc. (NASDAQ:AMZN) and its failed merger attempt with Office Depot Inc (NASDAQ:ODP), Staples, Inc. (NASDAQ:SPLS) shares are down by 17% year-to-date. Staples’ fall has caused its quarterly dividend of $0.12 per share to yield north of 6.3%. Seeing as how Staples lost money over the last 12 months, calculating the company’s payout ratio is not possible, but obviously it’s not good. Fortunately, analysts expect things to get better for Staples, as Wall Street expects the office supply company to earn $0.90 per share next year on expectations that the U.S. economy remains robust. If that happens, Staples dividend will be safe, and its forward payout ratio will be a manageable 0.53.
Mattel, Inc. (NASDAQ:MAT)
– Number of Hedge Fund Shareholders (as of June 30): 34
– Total Value of Hedge Funds’ Holdings (as of June 30): $597.47 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 5.60%
Toy maker Mattel, Inc. (NASDAQ:MAT) currently pays a $0.38 per share dividend per quarter, good for a forward yield of 4.59%. While that yield is music to many investors’ ears, the company didn’t cover its dividend payout over the last 12 months with its earnings, giving it a payout ratio of 144.6% according to Finviz. Fortunately, Mattel reported a solid third quarter recently, with EPS of $0.70 on revenue of $1.8 billion, missing bottom-line expectations by $0.01 per share, but coming in well ahead of its quarterly dividend payout nonetheless. If the Mattel executes, its future earnings should more than cover its dividend going forward; analysts expect it to deliver EPS of $1.78 next year, versus the company’s current dividend payout of $1.52 per share).
Royal Dutch Shell plc (ADR)(NYSE:RDS.A)
– Number of Hedge Fund Shareholders (as of June 30): 37
– Total Value of Hedge Funds’ Holdings (as of June 30): $1.71 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 0.90%
With a market cap of over $200 billion, tens of thousands of fixed income holders, and a yield of over 7.4%, Royal Dutch Shell plc (ADR)(NYSE:RDS.A) has been without a doubt a dividend investor favorite over the past few quarters. Due to low oil prices, the company has also lost money for the last 12 months, making calculating a payout ratio problematic. Given OPEC’s decision to cut production, oil prices have surged, and Brent is now north of $50 per barrel. The rising prices should help Shell’s dividend; analysts expect the company to earn $4.18 per share next year, which will more than cover the annual cost of $3.76 per share. However, Royal Dutch Shell still needs to do some work to integrate its acquisitions and OPEC will need to follow through in November for the company’s earnings to reach expectations and its payout ratio to drop below 1.00.