These Types of Dividend Stocks Look Increasingly at Risk

Over the past month, we've witnessed one of the larger bloodletting in U.S. equities, with all the major market indexes down 29% to roughly 40% in the case of the Russell 2000. While I'm sure you're familiar with the cause, I find it's always best to set the table for the conversation to be had -- the markets and investors are struggling with the ramping coronavirus and the uncertainty it is bringing along with it, in terms of what it will do to the demand and the supply chain. There is also the near free fall in oil prices that reflects falling global demand as a result of the virus and the current oil war between Saudi Arabia and Russia. During each of the last several days, we've witnessed a fresh and growing list of companies that are closing retail locations and shutting services, trimming hours or changing up services to customers. Gas prices are falling, but at least in the short-term consumers aren't able to enjoy the benefit as they self-sequester themselves to avoid spreading the virus even further. Much if not all of this was unthinkable as we entered 2020, but a result is companies pulling guidance, analysts re-thinking how to recast their models and economic forecasts that are moving lower in seemingly a mad dash. The average investor is one that doesn't look to grab a falling knife. The market pull back has popped dividend yields for quality companies as well as those that investors may find less-than-desirable once they dig into the balance sheet. Case in point is L Brands , the home at least for now of Victoria's Secret and Bath & Body Works. I called the company's balance sheet issues out last May, given the market strain it is now trading with a dividend yield of more than 10%. That reflects the current dividend of $1.20 per share on an annualized basis, but when we revisit the company's financial statements in its most recent 10-Q filing -- $5.5 billion in long-term debt, negative $1.2 billion in shareholder's equity, $340 million in cash, and $92 million in quarterly interest expense -- it's a mess, plain and simple. No wonder the company is looking to close a deal with to sell a majority interest in Victoria's Secret to Sycamore Partners. Granted the company may get a cash injection from Sycamore, but let's remember it will be in exchange for a business that was once the bread and butter of the company. Paired with the drop we saw in February, retail sales that will only grow in size in March and most likely April, given the coronavirus outbreak, it's looking to me like the current dividend yield is more warning than opportunity. And L Brands isn't going to be alone in this. Movie theaters, restaurants, retailers and other gathering places, such as malls, are going to struggle in the coming weeks, given the advice people should avoid groups of 10 or larger. That doesn't sound like a positive for Dave & Busters and its 12.8% dividend yield, nor does it sound good for AMC Entertainment and its 4.8% dividend yield. AMC's debt to total capital clocks in at 89%, and another mall staple, Signet Jewelers has an even higher debt to total capital ratio of 73%, which likely means its dividend yield of more than 13%. Companies with a big mall presence are likely to take it on the chin as foot-traffic inspired buying shrivels up in at least the next few weeks. The moral of the story, especially now as we face an unprecedented speed bump in consumer demand, is to determine if a company's business can not only support its dividend, but isn't going to fall victim of a near-term cash crunch because of the steps being taken to fend off the coronavirus. And before we finish up, I recently touched on why I had dividend concerns for several oil patch companies as oil prices. More specifically I called out Occidental Petroleum , which recently announced a cut to its dividend, given the risk that things were likely to be far worse than the company expected. At the time, Occidental shared it was making moves to shore up its business that would lower our cash flow breakeven level to the low $30s WTI, excluding the benefit of our hedges, positioning us to succeed in a low commodity price environment. As we sit here today, WTI crude is below the $27 per barrel level vs. almost $61 as we entered 2020. Odds are there will be more dividend cuts to be had in the coming days and weeks.

These Types of Dividend Stocks Look Increasingly at Risk

As we face an unprecedented decline in demand, now we must determine which companies can support their dividends, and stave off crushing cash woes.

Columnist Conversation

Monday Morning Fibocall for 3/1/2021

Watch Bob Lang and Doug Kass Discuss Short-Selling!

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.