These 3 Stocks Pay High Dividends. But I Still Wouldn't Touch 'Em
Let's look at why the fundamentals say these popular stocks should be avoided.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
Income investors naturally gravitate toward high-yielding stocks, and for good reason: It's very appealing to be able to purchase a stock yielding 8% or higher, especially when interest rates are relatively low.
Investors need to avoid dividend cuts (or even worse, dividend eliminations) at all costs. Stocks that cut or eliminate their dividends not only result in lower dividend income, but their share prices often get whacked as a result. This creates a double-dose of pain for the investors, through lower income and a lower share price.
Therefore, investors should be on the lookout for extreme high-yielders, particularly those with deteriorating fundamentals.
The following three dividend stocks have extremely high yields, but poor fundamentals, which could lead to a dividend cut down the road.
Cancel Kohl's
Kohl’s KSS traces its roots back to a single store: Kohl’s Department Store in 1962. Since then, it has grown into a leader in the space – offering women’s, men’s and children’s apparel, housewares, accessories, and footwear in more than 1,100 stores in 49 states. The company should generate roughly $16 billion in sales this year.
From 2007 through 2018, Kohl’s was able to grow earnings per share by about 4.7% annually. But this was driven by the company’s extensive share repurchase program. Over that period the share count was nearly halved, a reduction rate of -5.6% per year.
Conditions have drastically worsened, however, for Kohl's business model. First, department stores remain under significant pressure as mall-based retail fades in relevance for consumers. Online retail giants such as Amazon and others continue to take business from traditional brick-and-mortar department stores.
Secondly, tariffs are a major potential headwind for department stores such as Kohl's, as their costs of merchandise could rise.
Kohl's is expected to earn $1.30 per share for fiscal 2025, but the current annualized dividend payout is $2.00 per share, equating to a forward payout ratio of more than 150%. This appears unsustainable barring a major increase in earnings, which seems unlikely given the economic headwinds described above.
With the share repurchase program also having been paused, we don’t see that as a tailwind for the time being. Fears of struggling margins have proven to be right, as the past few years have seen declining profitability. We note that 2021’s earnings has the potential to be the top for some time.
We forecast EPS at $1.85 this year as the company is seeing weakened demand come to fruition, and significant margin headwinds, along with much weaker sales.
'Dash' From B&G Foods
B&G Foods, Inc. BGS is a consumer staples company with operations in the U.S., Canada, and Puerto Rico. Some of the company’s well-known brands include Green Giant, Cream of Wheat, Cary’s, Ortega, Mrs. Dash, and Maple Grove Farms, with 50+ brands in total.
It product portfolio focuses on shelf-stable, frozen and snack brands. On December 1st, 2020, B&G Foods completed the acquisition of Crisco.
B&G Foods reported third quarter 2024 results in November, revealing net sales of $461 million, an 8% decrease compared to the third quarter of 2023, mostly as a result of lower volume and the Green Giant U.S. shelf-stable product line divestiture. Adjusted net income equaled $10.1 million or $0.13 per share compared to $20.5 million or $0.27 per share in Q3 2023.
B&G Foods reduced 2024 guidance again and now expects $1.920 billion to $1.950 billion in net sales and adjusted EPS between $0.67 to $0.77 (from $0.70 to $0.90 previously).
With a current annualized dividend payout of $0.76 per share, the company's EPS are likely to come in below this level for the year. Analysts expect EPS to continue falling in 2025 to $0.67 per share, making it highly difficult for the company to maintain the current dividend payout.
The balance sheet has also deteriorated. At the end of the third quarter, BGS had long-term debt of $1.81 billion, compared with just $54.7 million in cash and cash equivalents.
Meanwhile, interest expense for the third quarter was $42.1 million, up 17.5% from the same quarter the previous year. Interest expense accounted for 82% of the company's operating income for the third quarter.
A Bad Copy: Xerox Corporation
Xerox Corporation XRX traces its lineage back to 1906 when The Haloid Photographic Company began manufacturing photographic paper and equipment. Through a series of mergers and spinoffs, the Xerox we know today was formed.
Xerox spun off its business processing unit in 2017 (now called Conduent) and now focuses on design, development, and sales of document management systems.
The major problem facing Xerox is the continued decline in demand for many of its core products. This has resulted in a significant fundamental decline for the company.
In the 2024 fourth quarter, Xerox's revenue declined 8% in constant currency while the company posted a net loss of $21 million. For the full year, revenue fell 9.5% in constant currency, leading to a net loss of $1.32 billion for 2024. The company absorbed a massive writedown of $1 billion due to an impairment charge.
Analysts expect the company to become profitable in 2025, with average EPS estimates of $1.18. Even so, with a current annualized dividend payout of $1 per share, it will be challenging for XRX to maintain its dividend unless its recent fundamental decline reverses.
At the time of publication, Ciura had no positions in any stocks mentioned