We're looking for companies with high dividend yields (more than 3%) that appear unsustainable, and we ran a Bloomberg screen to find them. CF Industries (CF) , Guess (GES) and National CineMedia (NCMI) are three of the names that, at first glance, we believe readers should avoid chasing at current levels.
We've already done extensive work on the energy sector, so we excluded those companies from our search. Each stock we found is facing declining profits and is expected to earn less than it pays in dividends this year. In addition, each company fell short of consensus analyst estimates in the most recent quarter.
Take CF Industries, a fertilizer producer. The company currently pays a quarterly dividend of 30 cents a share (4.8% yield) and investors at the close of trading Aug. 10 qualified for the latest payment.
CF's earnings are expected to fall 71% in 2016 to $1.11 a share. Earlier this month, management posted quarterly results that fell short of consensus analyst estimates. CF earned 33 cents a share in the second quarter, as revenue fell 13% year over year to $1.13 billion.
Industry overcapacity is weighing on pricing and will likely not be resolved until 2018. The company already has suspended its share repurchase program and we believe the dividend could be next on the chopping block.
The stock has lost 39% year to date and recently traded at around $24.89, wiping out any potential benefit of the dividend.
Next, Guess is an apparel retailer that offers investors a quarterly dividend of 22.5 cents a share (5.7% yield). Even so, earnings are expected to decline 39% in fiscal 2017 (ending January) to only 58 cents a share.
The company will announce quarterly results on Aug. 24. In May, management posted April quarter numbers that fell short of expectations. Guess lost 23 cents a share in the fiscal first quarter as revenue dropped 6% from the previous year to $448.8 million.
The shares have lost 15% so far this year and recently changed hands at around $15.89, but the company remains expensive at 27 times expected full-year earnings.
Finally, National CineMedia operates an advertising network through movie theaters. The company pays a quarterly dividend of 22 cents a share and investors at the close of trading on Aug. 22 qualified for the next payment.
NCMI is expected to earn just 42 cents a share in 2016, which would be down 17% from the previous year and would represent just 48% of the annual dividend. Earlier this month, National CineMedia posted quarterly results that fell short of expectations and lowered full-year guidance.
The stock has moved 4% lower year to date and recently changed hands around $15.
Along with the stocks highlighted above, we've identified other companies with unsustainable dividends that should be avoided by investors. You can view the complete list by signing up for a free trial of Dividend Stock Advisor here. As a subscriber, you'll have access to our Dividend Stock Advisor portfolio - a diversified portfolio of stocks that generate reliable and significant income. You'll receive updates with exact steps to take -- buy, sell or hold.
David S. Peltier