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Income investors should know better than to chase high yields. It’s a lesson that Linn Energy (LINE) investors learned the hard way when the oil and gas explorer slashed its distributions last week. The market should expect more energy companies cutting their payouts in the coming weeks. It’s hard to shell out beefy payouts with oil prices plunging.
However, it’s not just energy companies that are vulnerable. Let’s take a look at some investments that may turn to dividend cuts in 2015.
SeaWorld Entertainment (SEAS)
When SeaWorld announced last month that it was postponing its dividend from December to January, it wasn’t a reason to panic. The struggling theme park operator had spent a lot of money buying back stock, limiting its ability to return money to shareholders as 2014 came to a close without triggering debt covenant restrictions.
It lived up to its promise on Monday, declaring the same 21-cent a share quarterly dividend it would have paid out last month. That’s good, but what isn’t good is that SeaWorld is expected to have earned just 71 cents a share for all of 2014. You can’t pay 84 cents a share in dividends if profits aren’t there, and with SeaWorld already cutting costs to deal with its languishing attendance, it wouldn’t be a surprise if the company ultimately allocates its money to improve its attractions at the expense of lighter payouts.
CTC Media (CTCM)
One of the largest dividends in media these days belongs to CTC Media, a television broadcaster with a quarterly distribution of 17.5 cents that translates into a head-turning yield of 14.7 percent. The problem with CTC Media is that it’s in Russia, and the reason that the payout rate is so high is because its stock has shed more than half of its value in recent months with the crash of the Russian stock market.
CTC Media isn’t a bad company. It’s got a clean balance sheet. It’s still very profitable. However, the last time that its stock took a big hit in late 2011, it responded with a dividend cut in early 2012.
Windstream (WIN)
Some of the biggest yields among telecom providers can be found in regional carriers. Companies like Windstream and Frontier (FTR) focus on underserved rural markets where they don’t have to compete as aggressively against the major telecommunications providers. The problem, as you can probably imagine, is that even folks in small towns are kissing landlines goodbye. Companies like Windstream, Frontier and CenturyLink (CTL) have tried to offset the slide by growing in Internet access and business services, but it’s still a hard gig.
Frontier cut its dividend in 2011. CenturyLink followed a year later. Windstream has held out. That may not last. Analysts see another year of declining revenue in 2015, and they see Windstream earning half as much as it did two years ago. Windstream’s plan is to spin off its operations next month as a real estate investment trust. Since payouts will be tied to actual performance, it’s a fair bet that the days of quarterly $0.25-a-share distributions are toast.
Coca-Cola (KO)
This one may be a bit of a stretch, but Coca-Cola’s impressive streak of hiking dividends for 50 consecutive years can’t continue forever if global soda consumption remains stagnant. It’s actually worse than stagnant for Coca-Cola, since revenue and earnings have declined for two years in a row despite the company investing in other beverage categories outside of carbonated drinks.
Coca-Cola’s payout ratio — the percentage of earnings that it’s allocating to dividends — is now at 0.64. The median ratio over the past 13 years is 0.5, according to GuruFocus.com. That gives it the leeway to keep returning money to its stakeholders, but with a more pressing need to invest in growth to offset the gradual demise of pop, it may decide at some point that keeping a 50-year streak alive isn’t as important as snapping up the catalysts to start growing as a business again.
Motley Fool contributor Rick Munarriz owns shares of SeaWorld Entertainment. The Motley Fool recommends Coca-Cola. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. Want to make 2015 a winning investment year? Check out The Motley Fool’s one great stock to buy for 2015 and beyond.
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Source: Investing
