Three Stocks With Unsustainable Dividends 2018
Peter Sayles |
It’s one of the biggest investor traps.
It sends thousands of dollars to money heaven. And continues to be a major mistake among most individual investors.
Many people see a high dividend yield and consider it a buying opportunity.
But no one ever wonders why the dividend yield is high in the first place.
They just buy because “hey, the stock pays 6%. My bank account pays nothing. What could go wrong?”
(Real Estate Investment Trusts and Master Limited Partnerships aren’t included in this conversation.)
But this mistake can mostly be avoided in 45 seconds.
This post is to show you how to avoid this mistake. Then show you three companies that currently pay unsustainable dividends. (Speculators can look at shorting or put options on these companies)
1)Barnes & Noble (BKS)
How many people actually buy their books in a store anymore with any consistency.
It’s obvious who came in and turned Barnes & Noble into a losing bet: Amazon.
Barnes & Noble is down almost 70% since July 2015.
We can do a quick look at its financial statements to prove that:
- People are shopping at Barnes & Nobles less and less each year
- It cannot afford its dividend. And therefore, it’s 10% dividend yield is a trap.
B&N’s revenue is down 16% over the past 4 years. Its holding $958,000 in inventory ( all books?)
It has just $11 million in cash. But $460 million in accounts payable (what it owes other people like vendors). And another $160 million in long term debt (money it owes creditors).
This can all be found on Yahoo Finance balance sheet for BKS (click here).
Barnes & Noble’s balance sheet alone should cause investors to steer clear.
Why investors are still holding it, we’re not sure. If so, it’s probably because of the current 10% dividend yield.
2) B&G Foods Inc. (BGS)
B&G Foods owns and distributes dozens of fresh and frozen products.
Notable brands include Green Giant, Ortega, Pirate Brands (including Pirate’s Booty), Mrs. Dash, Spice Islands, among dozens more.
It’s not news investors are opting for healthier fresh and/or healthier foods.
But that’s not B&G’s problem.
Investors will look at revenues and see a nice uptrend. Sales increased from $725 million in 2013 to $1.6 billion in 2017.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) also increased. EBITDA went from $184 million in 2013 to $333 million in 2017.
Average investors might look at B&G as a growing company. Where their finances are fine.
But they didn’t look a little deeper. And ask the question: “At what expense did they grow revenue and EBITDA.”
First – B&G has taken on a massive amount of debt. Their interest expense have increased from $41 million in 2013 to $91 million last year. (There’s nothing wrong with leveraging up. It can be very beneficial for many companies. But B&G has levered too much too fast.)
B&G’s Senior Debt has increased by 158% over the past 5 years. Senior Debt now stands at 7.8x EBITDA – an ugly stat for a food company.
We don’t think B&G can leverage up that much more. And as a result, we don’t think it will be able to continue paying its dividend at current levels.
Why? Well B&G has earned $335 million in free cash flow over the past 3 years – the money that’s left over after all capital expenses have been paid. This cash can be used for dividends, buybacks, or anything else.
B&G paid out 90% of that free cash flow in dividends. This leaves almost no room to grow the business. And is likely the reason B&G continues to borrow hundreds of millions of dollars. (It borrowed $500 million last year alone).
With no wiggle room to grow the business, we think B&G will have to sell some of its top brand names to help generate cash. The cash will be used to pay down debt first, and then help cover the dividends (debt payments are superior to dividends).
3) Big 5 Sporting Goods Corp (BGFV)
BGFV is a sporting goods retailer. It operates 435 stores in 11 states across the Western United States.
Its brands include Golden Bear, Pacifica, Beach Feet, BearPaw, and more.
BFGV’s dividend yield is over 11% right now. Anyone can see that and get distracted that the company itself is struggling.
The stock is down nearly 50% since June. And we think there’s more downside ahead. Which includes a dividend cut.
First, the company’s revenues haven’t moved in four years. Americans are flush with cash. They’re spending up across the board.
Yet somehow BFGV couldn’t find a way to increase their top line at all in four years. They could’ve at least taken B&G Foods’ playbook and grow revenues through acquisitions.
That was the first red flag.
The second red flag was BGFV’s Selling General & Administrative costs eat almost 100% of its gross profit.
That means BGFV is paying its CEO, board, and employees all of its gross profit. And not leaving anything leftover for growing the business… a second red flag.
The third red flag was its balance sheet. It has only $7 million in cash. But $330 million in inventory. Yet it has over $160 million in short term debt (debt due within 12 months) and accounts payable.
Where is BGFV going to get the money to pay for its short term debt and its merchants when it has $7 million in cash and makes $0 in net income?
Yeah we don’t know either.
Oh yeah, the dividend. It pays about $13 million per year in dividends. But we’ve shown you BGFV doesn’t even turn a profit.
It’s going to have to sell off brands, tap the debt markets, or issue equity like B&G Foods to pay its dividend. All are a big negative on the share price.
We don’t see any scenario that’s positive for shareholders who are holding the stock.
Investors are hungry in a yield-starved world.
The safest stocks have risen so high which has pushed down dividend yields.
This has caused investors to blindly put their money in any asset class that shows a high yield without any due diligence.
Barnes & Noble, B&G Foods, and BGFV all have high dividend yields. Investors may see them, know their names, and think they’re safe.
But we think that’d be a foolish decision. We don’t think their dividends are sustainable.
Avoid these stocks.