‘Cliffs Natural Resources the biggest U.S. iron ore producer, fell the most in more than three years after cutting its quarterly dividend by 76 percent and announcing a share sale to repay debt.’
‘Cliffs reduced the payout to 15 cents a share, the Cleveland-based company said in a statement after the close of trading yesterday. That erases the increase made in March, when Cliffs raised the dividend to 62.5 cents from 28 cents’
Source: Bloomberg
This is the kind of announcement that dividend investors fear. Before Cliffs announced this cut, the share was yielding 7.5%, a yield far above the market average. Now, the stock yields just 2%, below the market average.
In the second, third and fourth quarters of 2012, Cliffs spent $89 million a quarter on its new higher dividend of 62.5 cents a share. Cliffs was spending this cash on dividends even though the company had a negative free cash flow of around -$200 million, which meant that Cliffs had to either borrow the money, issue shares or dig into is cash reserve to fund the dividend.
With Cliffs’ failure still fresh in investors’ minds what is the situation of other high yielding companies in the S&P 500, can they sustain their dividends?
Two Harbors Investment Corp (NYSE:TWO)
| Market cap | $3.74B |
| P/E ratio | 11.24 |
| EPS | $1.13 |
| Dividend | $1.70 |
| Div. yield | 17.3% |
At first glance it would appear as if Two Harbors Investment Corp (NYSE:TWO) cannot sustain its dividend. Two Harbors Investment Corp (NYSE:TWO) paid out $1.70 in dividends only EPS of $1.13.
| $US | 03/01/2012 | 06/01/2012 | 09/01/2012 | 12/01/2012 | Average |
| EPS | 0.28 | 0.11 | 0.10 | 0.64 | 0.3 |
| Dividend | 0.40 | 0.40 | 0.36 | 0.55 | 0.4 |
| Cover from EPS | 0.7 | 0.3 | 0.3 | 1.2 | 0.6 |
Indeed, on a quarterly basis the only periods where Two Harbors Investment Corp (NYSE:TWO) has been able to sufficiently cover its dividend from earnings was in the last quarter of 2012. During all three previous quarters the dividend was almost double EPS.
| $US Millions | 12/01/2011 | 03/01/2012 | 06/01/2012 | 09/01/2012 |
| Net Operating Cash Flow | 63 | 36 | 49 | 78 |
| Net Investing Cash Flow | 583 | -2532 | -1810 | -4040 |
| Cash Dividends Paid | 56 | 56 | 86 | 87 |
| Change in Capital Stock | 0.1 | 692 | 55 | 790 |
| Issuance/(Reduction) of Debt, Net | (640) | 2030 | 3780 | 3600 |
| Net Financing Cash Flow | -696 | 2670 | 1710 | 4300 |
| Net Change In Cash | -50 | 185 | -50 | 336 |
| Free Cash Flow | 7 | -20 | -109 | -128 |
Two Harbors Investment Corp (NYSE:TWO)’ is an mREIT; therefore the company’s cash flows look a lot different to the rest of the group. While other companies have to balance net operating cash flow with net investing cash flows, mREITs do not as they are constantly re-shuffling their mortgage backed assets and loans. In addition, the company will issue a lot of debt to finance its purchase of mortgage backed securities. However, this debt is usually re-purchase agreements, which are mostly risk free
So, with that in mind does Two Harbors Investment Corp (NYSE:TWO) have room to pay its dividend? Well in contrast to the rest of the group, I will analyze Two Harbors Investment Corp (NYSE:TWO)’ dividend based on the company’s net operating cash flow only.
It appears Two Harbors Investment Corp (NYSE:TWO) cannot afford its dividend from its net operating cash flow. Consistently, the company has paid out more in dividends than it has received in operating cash flow from its operations, meaning the company has needed to issue stock or debt in order to finance its dividend payouts. I’m afraid Two Harbors does not survive this dividend test.
AstraZeneca plc (ADR) (NYSE:AZN)
| Market cap | $56.83B |
| P/E ratio | 9.15 |
| EPS | $4.99 |
| Dividend | $2.85 |
| Div. yield | 6.32% |
From this quick overview, it appears AstraZeneca plc (ADR) (NYSE:AZN) is able to cover its dividend from EPS. Astra paid out dividends of $2.85 during 2012 on EPS of $4.99.
| $US | 03/01/2012 | 06/01/2012 | 09/01/2012 | 12/01/2012 | Average |
| EPS | 0.81 | 0.8 | 0.77 | 0.76 | 0.79 |
| Dividend | 1.95 | 0 | 0.9 | 0 | 0.71 |
| Cover from EPS | 0.4 | 0.0 | 0.9 | 0.0 | 1.1 |
However, on a quarterly basis the company is not able to cover its dividend. That said, taking into account the average figures across the year, shown at the end of the table it would appear that on a yearly basis AstraZeneca plc (ADR) (NYSE:AZN) is able to cover its payout at least once from earnings.
| $US Millions | 03/01/2012 | 06/01/2012 | 09/01/2012 | 12/01/2012 |
| Net Operating Cash Flow | 1540 | 2791 | 4100 | 6948 |
| Net Investing Cash Flow | 593 | 1353 | -1345 | -1859 |
| Cash Dividends Paid | -2505 | -2505 | -3665 | -3665 |
| Change in Capital Stock | -912 | -2505 | -2273 | -2206 |
| Issuance/(Reduction) of Debt, Net | (34) | (62) | 1492 | 917 |
| Net Financing Cash Flow | -3438 | -4156 | -4398 | -4923 |
| Net Change In Cash | -1291 | -20 | -1633 | 162 |
| Free Cash Flow | -657 | 719 | 17.2 | 1600 |
AstraZeneca plc (ADR) (NYSE:AZN)’s net cash flow leaves plenty of room for dividend payments after the deduction of investing cash flows.
The company was buying back stock during 2012 and it looks like this put pressure on cash flows. Indeed, in the third quarter of 2012, AstraZeneca plc (ADR) (NYSE:AZN) had to issue $2.5 billion of debt to fund part of its buybacks. However, AstraZeneca plc (ADR) (NYSE:AZN) has announced that it will not continue its buyback program into 2013, which will reduce the pressure on the company’s cash flows.
Still, excluding the effect of stock buybacks dividends remained well covered and the company actually had a positive free cash flow for the last three quarters of 2012.
AstraZeneca passes this dividend test now it has stopped buying back stock.
Windstream Corporation (NASDAQ:WIN)
| Market cap | $5.26B |
| P/E ratio | 28.84 |
| EPS | $0.31 |
| Dividend | $1 |
| Div. yield | 11.20% |
With a yield of 11.2% it appears that Winstream is not able to cover its dividend from EPS. The company paid out $1 in dividends during 2012 on earnings of only $0.31.
| $US | 12/01/2011 | 03/01/2012 | 06/01/2012 | 09/01/2012 | Average |
| EPS | -0.03 | 0.11 | 0.09 | 0.09 | 0.07 |
| Dividend | 0.25 | 0.25 | 0.25 | 0.25 | 0.25 |
| Cover from EPS | -0.1 | 0.4 | 0.4 | 0.4 | 0.3 |
Windstream Corporation (NASDAQ:WIN)’s inability to be able to cover its dividend is highlighted further in its quarterly figures. On a quarterly basis the company has not been able to cover its dividend from EPS for the past twelve months. For the past four quarters the company has an average quarterly dividend cover of only 0.30.
| $US Millions | 12/01/2011 | 03/01/2012 | 06/01/2012 | 09/01/2012 |
| Net Operating Cash Flow | 309 | 438 | 398 | 407 |
| Net Investing Cash Flow | -126 | -176 | -288 | -343 |
| Cash Dividends Paid | -129 | -147 | -147 | -147 |
| Change in Capital Stock | 0 | 0 | 0 | 0 |
| Issuance/(Reduction) of Debt, Net | 135 | (272) | 15.3 | 148 |
| Net Financing Cash Flow | 9.3 | -426 | -137 | 13 |
| Net Change In Cash | 193 | -163 | -27 | 77.3 |
| Free Cash Flow | -25 | 54 | -51 | -79 |
Despite the fact that Windstream Corporation (NASDAQ:WIN)’s EPS are not sufficient to cover dividends, the company’s cash flows tell a slightly different story. If the investing cash flow is deducted from the operating cash flow, the company has plenty of cash left over to pay its dividend. Furthermore, in the first quarter of 2012, the company had enough free cash to buy back some debt.
However, despite the good performance in the first quarter of 2012, the company fell behind in the third quarter and was forced to issue debt to sustain the dividend.
Overall, Windstream Corporation (NASDAQ:WIN) is on a knife edge and I do not believe the current dividend is sustainable.
Pitney Bowes Inc. (NYSE:PBI)
| Market cap | $2.70B |
| P/E ratio | 6.12 |
| EPS | $2.22 |
| Dividend | $1.52 |
| Div. yield | 11.05% |
At a first glance it appears that Pitney is easily able to cover its dividend form EPS. The company paid out a dividend of $1.52 on EPS of $2.22 during 2012.
| $US | 03/01/2012 | 06/01/2012 | 09/01/2012 | 12/01/2012 | Average |
| EPS | 0.79 | 0.5 | 0.38 | 0.55 | 0.56 |
| Dividend | 0.38 | 0.38 | 0.38 | 0.38 | 0.38 |
| Cover from EPS | 2.1 | 1.3 | 1.0 | 1.4 | 1.5 |
On a quarterly basis, Pitney has been able to cover its dividend consistently every quarter, which gives the company the best record of coverage in the group. The dividend has been covered by earnings at least once in every quarter resulting in an average 5-yr dividend cover of one-and-a-half times.
| $US Millions | 12/01/2011 | 03/01/2012 | 06/01/2012 | 09/01/2012 |
| Net Operating Cash Flow | 170 | 96 | 274 | 70 |
| Net Investing Cash Flow | 52 | -4 | -11 | -81 |
| Cash Dividends Paid | -74 | -75 | -75 | -75 |
| Change in Capital Stock | 102 | 2 | 2 | 3 |
| Issuance/(Reduction) of Debt, Net | 0 | 28 | (578) | 0 |
| Net Financing Cash Flow | -81 | -45 | -660 | -73 |
| Net Change In Cash | 141 | 59 | -415 | -75 |
| Free Cash Flow | 63 | -29 | 160 | -45 |
Before the cash flows are considered, I must say that I believe Pitney operates within a dying industry and therefore even though dividends are well covered now, the company’s revenues are in terminal decline and future dividends should not be taken for granted.
That said, Pitney has been able to cover its dividends well from cash flow over the last four quarters. In addition, the company has a good cash balance so any short falls can be easily covered. Indeed the company used this cash balance to repay debt in the second quarter of 2012.
Pitney passes this test now but I believe future dividends will come under pressure.
Overall
So, out of these 4 contenders only two, AstraZeneca and Pitney Bowes pass the dividend test. That said, I believe Pitney’s dividend could come under pressure soon as the company grapples with falling revenues and declining sales.
Out of these four stocks, AstraZeneca is the only company that I believe will be able to sustain its dividend.
Data Source: Motley Fool CAPS, MarketWatch
The article Are These Dividends Safe? originally appeared on Fool.com and is written by Rupert Hargreaves.
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