4 Big Brands That Should Cut or Even Suspend Their DividendsBy Ryan Fuhrmann | Published January 14th, 2013
In general, big, well-known brand names and their underlying company owners throw off ample and steady cash flow. Hefty profit margins frequently result from the well-run firms, and also allow for equally generous dividend payouts to shareholders. However, a number of big brands pay dividends and probably shouldn’t be. Below are four that should consider cutting them altogether.
Back in January 2008, mobile phone maker Nokia (NOK) boasted a global market share of 40%. At that time, it had just closed out a successful year that saw fourth quarter profits jump 44% in important emerging markets, including China and parts of Africa. Nokia was riding high with popular phones and a global distribution system that was seen as very difficult to compete against.
Fast forward more than four years and Nokia’s global market share has plummeted by about half. More alarmingly, its share of the smart phone market is in the single digits. Last year, it reported a loss of more than 1 billion Euros and free cash flow of only about 0.19 Euros per share. These earnings fell well below the 0.33 Euros per share in dividend payments to shareholders. Its current dividend yield is well over 9%, but should be cut so that the company can better ensure its survival as the market continues to shift to smartphones. Find out about how dividends can go wrong in The Biggest Dividend Stock Disasters Of All Time.
Update (Jan. 24, 2013): Nokia suspended its dividend payout for 2013.
2. Avon Products
Avon Products (AVP) possesses a solid business model that focuses on selling cosmetics and related consumer products to customers through a direct selling model that relies on an independent sales force. This model skips the traditional retail channel and a middle man that takes a cut of the profits. However, its now former CEO oversaw a terrible operating period that saw sales grow only modestly but profits plummet nearly 17% annually over the past three years.
Avon can regain its former glory, but needs to repay debt and may have major fines over ongoing bribery allegations of foreign officials in some of the overseas markets it operates in. It has also seen some bad debt expenses and has seen operating cash flow increasingly eaten up by higher spending, which hasn’t resulted in steadily increasing sales. Shareholders would be better off seeing the current dividend yield of 5.6% cut so that Avon can get its own house back in order. Before you start investing in dividend-paying stocks, know what you’re getting into; read 5 Common Misconceptions About Dividend Investing.
Update (Nov. 1, 2012): Avon cut its dividend payout by 74%.
3. Best Buy
Electronics retailing giant Best Buy (BBY) has a leading brand name but has been making headlines for the wrong reasons lately. Its founder, who remains one of its largest shareholders, recently offered to take the company private. This move stems over management turmoil and turnover as the company struggles for relevancy in the face of intense online competition from the likes of Amazon and eBay.
Best Buy’s current profit levels easily cover its current annualized dividend payout of 68 cents per share (or 3.8% yield). However, sales growth is expected to be flat at best over the next couple of years, as will projected profit growth. The key concern is that television and multimedia offerings such as music, movies, and video games continue to migrate online and eliminate a number of very important sales drivers at Best Buy. With such an uncertain future, Best Buy may also want to play it conservative and conserve cash to better ensure its future. For ideas on investing in dividend stocks, check out our High Yield Stock Tool.
Fast food leader Wendy’s (WEN) has a brand known for quality food and consistent service. However, in recent years it has allowed its store base to grow old and stale. A new management team will be making up for lost time and plans to double spending on company owned stores to refurbish old ones, and even knock down some to replace them with more efficient and modern locations.
Capex is projected to exceed $225 million in the next year or so and will likely result in negative free cash flow. Wendy’s is currently only paying out 8 cents annually in a dividend for a yield of 1.8%, but there is really no need for it to be paying out anything given the major investments needed in refreshing its restaurants over the next few years.
No Company, No Dividend
Some of above firms that are struggling for survival should seriously consider cutting their dividends completely. Others may simply want to take the conservative route and conserve capital. At the end of the day, income-minded investors may jump ship, but the economics of their current operations suggest dialing back the current dividend payouts.
At the time of writing, Ryan C. Fuhrmann did not own shares in any company mentioned in this article.