Author: Craig Adeyanju
Estimated read time: 3 minutes
Publication date: 9th Oct 2019 11:54 GMT+1
With some economists and analysts arguing that the global economy is struggling and the income-seeking investors' bonds market underwhelming, a lot of focus has been on dividend stocks. History has shown that dividend stocks tend to outperform in low bond yield environments, as income investors go after higher yields. This, therefore, increases the likelihood of buying subpar stocks, especially if they carry the high yield title.
While high dividend yields typically mean that the stock is cheap relative to the dividend a company pays, it can sometimes be a sign of fundamental issues with the company in question. This is better explained by the fact that falling stock prices are one of the ways that dividend stocks attain high yields. That said, here are some value traps disguised as attractive dividend stocks that investors should avoid.
Note: All quotes, including stock prices, dividend, and dividend yields were as of market close on October 4, 2019.
Tony Webster, Flickr
Market Cap: $12.62 billion
Annual dividend: $1.00
Dividend Yield: 8.67%
Year-to-date performance: -23.83%
Telecommunications company CenturyLink Inc. (NYSE: CTL) has traditionally offered land phone, TV and internet services across the U.S. Given, the shrinking land phone and cable market, the company's top and bottom lines have struggled to grow. In a bid to reverse its fortunes, however, the company has expanded to the offering of high-speed fibre-optic cable. In 2017, it acquired Level 3 Communications in a bid to expand more rapidly in the space.
Over the last four reporting quarters, CenturyLink has reported an overall loss of nearly $8 billion (and an EPS of -7.43). While analysts expect earnings to rebound to 1.32 by the end of 2019, they aren't confident that the company's present moves are sufficient to bring rapid bottom-line expansion. Forecasts are that CTL earnings will only grow by a meager 1 cent in 2020.
What's more, the debt incurred when the company acquired Level 3 putting pressure on dividend payouts. Management cut dividends for the first time in about three decades in February, cutting dividends almost in half from 54 cents per quarter to 25 cents per quarter. While the company has had a healthy free cash flow trend over the past three years, thee earning growth issues at the company leaves little to be desired. Investors may want to wait for at least a few quarters to see if CenturyLink's fibre-optic business can be the source of revenue growth.
Market Cap: $4.89 billion
Annual dividend: $1.20
Dividend Yield: 6.61%
Year-to-date performance: -28.09%
Like CenturyLink, L Brands Inc. (NYSE: LB) has had to slash its dividend over the past year. As part of its Q3 2018 earnings announcement, L Brands' management cut payout in half, from 60 cents per quarter to 30 cents per quarter.
In addition, its Victoria's Secret brand is having to contend with increasing competition from brands including Amazon American Eagle's sub-brand Aerie and even retailer Target. The increasing competition, while not necessarily leading to the loss of market share yet, is putting pressure on the company's profitability.
As shown in the chart above, the company has seen its gross margins from the 45% region three years ago to about 36.6% at present. L Brands had witnessed a 6-year period of sustained gross margin growth. As expected, the shrinking gross margin is leading to a deceleration in earnings.
If you're wondering what dividend stocks are worth a look right now, you should check out our list of dividend stocks that analysts love.
Disclaimer: Craig Adeyanju is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.
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