{"id":29419,"date":"2012-05-02T11:34:44","date_gmt":"2012-05-02T15:34:44","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/05\/2-high-yield-dividend-stocks-to-avoid-vivo-pt\/"},"modified":"2012-05-02T11:34:44","modified_gmt":"2012-05-02T15:34:44","slug":"2-high-yield-dividend-stocks-to-avoid-vivo-pt","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/05\/02\/2-high-yield-dividend-stocks-to-avoid-vivo-pt\/","title":{"rendered":"2 High-Yield Dividend Stocks to Avoid (VIVO, PT)"},"content":{"rendered":"

Article by Investment U<\/a> <\/p>\n

\"2<\/p>\n

Meridian Biosciences (Nasdaq: VIVO) and Portugal Telecom (NYSE: PT) have a high risk of cutting their dividends.<\/p>\n<\/div>\n

Dividend investors are enamored with yield. Obviously, they want to get paid as much as they can. It\u2019s why stocks like Annaly Capital Management<\/strong> (NYSE: NLY<\/a>) and its 13.5% yield are so popular.<\/p>\n

But what many investors ignore in their search for yield is safety. What good is a high yield if the dividend is cut in the near future? Not only does an investor receive less income when a dividend is cut, capital can be lost, as the stock usually tanks as a result.<\/p>\n

When I look to add a stock to The Perpetual Income Portfolio, yes, I\u2019m looking to obtain as high a yield as I can, but only<\/span><\/em> if I\u2019m comfortable the dividend is safe. If I\u2019m not confident, then I won\u2019t recommend the stock no matter how juicy the yield is.<\/p>\n

To analyze the safety of a dividend, look at the payout ratio, which is the percentage of net income paid out in dividends \u2013 although I use a slightly different formula. I look at cash flow from operations and free cash flow instead of net income, because net income, or profits, can be manipulated fairly easily with accounting tricks. Cash flow, which represents the actual amount of cash that came into a business versus the cash that went out, is a more accurate representation of a company\u2019s business.<\/p>\n

So let\u2019s take a look at a couple of companies whose dividends may not be entirely safe.<\/p>\n

The first one is Meridian Biosciences<\/strong> (Nasdaq: VIVO<\/a>). It pays a 3.7% yield and business has been strong. I applaud management\u2019s desire to return a significant portion of profits to shareholders. However, they return too much. Their stated goal is to have a payout ratio (based on earnings) of 75% to 85% each fiscal year.<\/p>\n

My threshold for the payout ratio is 75%. Anything higher and the dividend could be in jeopardy if the company has a bad year.<\/p>\n

Meridian just reported quarterly results and earned $9.6 million in the quarter. Its dividend payment of $0.19 per share should come out to approximately $7.9 million, which equals 82% of its net income.<\/p>\n

The company\u2019s cash flow results weren\u2019t released. But in the last quarter, dividends ate up over 80% of free cash flow and in the three prior quarters, dividend payments were more than 100% of both earnings and free cash flow. The company has about $24 million in cash and no debt.<\/p>\n

With earnings expected to grow this year and next year, paying the dividend shouldn\u2019t be a problem if Meridian hits its numbers. However, if they experience a hiccup in business and net income falls, the company may have to dip into its cash to keep the dividend the same. And if business stalls for more than a quarter or two, the company would have to think seriously about cutting its dividend.<\/p>\n

Let\u2019s look at another.<\/p>\n

Portugal Telecom<\/strong> (NYSE: PT<\/a>) paid a dividend equal to all of its free cash flow in 2011. It did the same in 2010, but dividends didn\u2019t eat up all of its free cash flow prior to that.<\/p>\n

The company has 6.4 billion euros in debt and 5.7 billion euros in cash and it\u2019s located in a country that\u2019s facing difficult times right now. Keep in mind, it does a lot of business in Brazil, so it\u2019s not solely focused on Portugal. But the Portuguese portion of the business is something to worry about, particularly since its payout ratio based on free cash flow is 100%.<\/p>\n

Should the company run into trouble, it will likely cut the dividend the way some of its peers have. The 7.2% yield is attractive. But I\u2019m concerned it\u2019s not sustainable.<\/p>\n

For both companies, I\u2019m not saying a cut in the dividend is imminent, but if you\u2019re an investor in these stocks, you should be watching the financial statements very closely to see if there\u2019s any trouble on the horizon. Often, a company won\u2019t cut the dividend immediately after reporting a bad quarter. They\u2019ll wait to see if things improve. But then a quarter or two down the road, investors get hammered when the dividend is reduced.<\/p>\n

Keep a close eye on these two. You\u2019ve been warned.<\/p>\n

Good Investing,<\/p>\n

Marc Lichtenfeld<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n

Article by Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

Article by Investment U Meridian Biosciences (Nasdaq: VIVO) and Portugal Telecom (NYSE: PT) have a high risk of cutting their dividends. Dividend investors are enamored with yield. Obviously, they want to get paid as much as they can. It\u2019s why stocks like Annaly Capital Management (NYSE: NLY) and its 13.5% yield are so popular. But … <\/p>\n

Continue reading “2 High-Yield Dividend Stocks to Avoid (VIVO, PT)”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-29419","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29419","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=29419"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29419\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=29419"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=29419"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=29419"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}