What are the common factors among CenturyLink, Chimera Investment and HSBC Holdings?
They are all sitting on a dividend time bomb that is set to explode any time. They sport unsustainably high yields and payout ratios and are saddled with dull expectations for earnings per share growth over the next half a decade.
Let's take a look at each one.
However, the industry continues to fiercely compete with cable operators that offer higher broadband speeds, and team cable seems to be winning.
Although top telecom players added a net of 10,693 broadband subscribers in the first quarter, top cable companies walked all over telecom companies, signing up 1.065 million broadband subscribers in the same period, according to Leichtman Research Group.
The company has beat earnings estimates in the past three of four quarters, but analysts aren't exactly hopeful about its future performance. In fact, they expect CenturyLink to record nearly flat earnings growth for the next half a decade, far under-performing the industry and the S&P 500.
The company's 8% dividend yield is most likely a product of its continuously depressed stock prices, down more than 27% over the past two years with no long-term recovery in sight. With no increase in payouts announced since mid-2013 and the payout ratio also at a dangerously uncomfortable 128.7%, dividend payments aren't something to which investors should become accustomed.
And when the company last changed its divided three years ago, it was cut by more than one fourth.
Going by its past one-year performance, Chimera Investment seems to be keeping its head above water, compared with peers Capstead Mortgage and MFA Financial, which are down 10% to 20%.
True, first-quarter earnings of 58 cents a share beat estimates of 53 cents. But this comes after at least three quarters of earnings misses, except in the fourth quarter, when Chimera Investment met expectations.
However, dividend sustainability with a yield of 12.86% depends strongly on earnings performance. And in this challenging market for mortgage REITs, analysts aren't hopeful.
At a price-earnings ratio of 6.88, Chimera Investment may seem to be at a steep discount to the industry's P/E ratio of 9.17, but don't be fooled. Analysts across the board are downgrading the stock or lowering price targets.
Although Wells Fargo has twice downgraded the stock since the start of the year, Deutsche Bank and Nomura lowered their price targets. The stock is already trading higher than the Thomson Reuters consensus median target price of $14.25.
At a dividend yield of 8.2% and a payout ratio of 87.3% amid difficult market conditions, it didn't come as a surprise that analysts expected HSBC to put an end to its generous dividends. However, the bank stuck to its progressive dividend policy even as profitability declined, saying that only in the event of a widespread recession or material changes to capital requirements would a dividend cut be in the cards.
In the first quarter, though HSBC's profits didn't fall as much as expected, the decline was nevertheless precipitous. Adjusted revenue declined 4% to $13.9 billion, while adjusted profit before tax slipped to $5.4 billion, an 18% decline from a year earlier.
Although all global banks are suffering from the turmoil caused by interest rate uncertainty, gyrating crude oil prices and skittish markets, HSBC is in a particularly vulnerable position, given its exposure to emerging markets such as Asia. The region contributed 39% to 2015 revenue.
With earnings visibly under threat and analysts expecting growth of just a measly 1.4% annually for the next five years, dividends, the only saving grace of the stock, are bound to suffer sooner or later. Even if the bank continues to dole out the payments, with limited earnings inflows, HSBC would be digging deep into its pockets to fulfill its commitment, thus expanding payout ratios.
In conclusion, though Chimera Investment is trading almost flat from a year earlier, CenturyLink and HSBC are deep in the red. Rather than wait for a turnaround, it would be best to book losses and get out of these dividend traps now.
Check out this report to learn how to make money even on a falling investment. Click here for a free copy.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.