Furniture Yields Won't Polish Your Returns

Think you can sit back and collect dividends investing in furniture stocks? On the surface, Furniture Brands (FBN - commentary - Cramer's Take) and La-Z-Boy (LZB - commentary - Cramer's Take) both offer yields north of 3.8%, twice the payout of the average stock in the S&P 500. That said, after digging through the finances and weighing sales trends for these industries, it may be safer to keep your money in the mattress instead.

Furniture Brands yields 4% at Wednesday's closing price of $15.84. The company sells its wares under the Broyhill, Lane and Thomasville brand names and pays out 16 cents a share each quarter. FBN has boosted its payout two straight years but only kept its dividend steady in February when it was on track for another increase.

I'm also cautious about the company's payments because its earnings are on pace to fall 40% in 2007, marking the seventh annual decline in eight years.

The consensus analyst estimate is for Furniture Brands to earn just 64 cents a share in 2007, meaning that its entire annual profit will be paid out in dividends. I generally look for a minimum of two times earnings coverage to consider a dividend secure. To make matters worse, the company had just $26.6 million of cash on the balance sheet at the end of 2006, compared with more than $300 million of debt.

In other words, it will be difficult for management to sustain the current dividend payment without a potential secondary equity offering that would dilute current investors.

La-Z-Boy may be the world's largest seller of snooze-perfect recliner chairs, but investors who buy the stock for its 3.9% dividend yield may have trouble sleeping at night. The company pays out 12 cents a share each quarter, which works out to 166% of expected fiscal 2007 (ending April) earnings of 29 cents. Like Furniture Brands, La-Z-Boy's earnings have been in free fall the past four years and are expected to fall another 37% this year.

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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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