Risky High Yield Stock #2: Spectra Energy Corp. (NYSE:SE)
Spectra Energy Corp. (NYSE:SE) stock offers investors a 6.4% dividend yield. The company’s stock is down more than 30% so far this year due to falling oil prices. Spectra Energy has paid steady or increasing dividends every year since 2007.
At the end of September, the company was included in the equity portfolios of 24 funds followed by Insider Monkey, up from 22 a quarter earlier. However, these funds amassed just $146.53 million worth of shares, which represented around 0.80% of the company’s stock.
In its most recent quarter, Spectra Energy realized distributable cash flows of $223 million. This amount includes spending on maintenance capital expenditures. The company paid out around $248 million in dividends.
When your dividend is more than the amount you have to distribute (before investing in growth), something has to give.
Like ONEOK, Spectra Energy’s balance sheet is far from clean:
– Pension underfunded by around $100 million
– $14.24 billion in debt versus $0.34 billion in cash
– $1.3 billion of debt is due in the next 12 months
The company’s recent stock price declines make now a poor time to issue new shares to fund growth (and dividends). Additionally, Spectra Energy carries a tremendous amount of debt.
High debt and an inability to fund the dividend and growth make Spectra Energy Corp. (NYSE:SE) a prime candidate for a dividend cut if oil and gas prices continue to stay low.
While both of the stocks above appear to offer attractive yields, they are far too risky for dividend growth investors who rely on stable, growing dividends.
Stocks with large debt loads and high payout ratios are especially at risk of business downturns. Declining oil and gas prices are the negative catalyst that is exposing highly leveraged firms in the historically volatile oil and gas industry.
In general, you can safely have an above-average yield with little growth, or above-average growth without an exceptionally high yield. Business models that offer both high payout ratios and rapid growth are likely overly dependent upon outside financing. When things go bad (and something bad will always happen at some point), the fragility of this type of business model is exposed.