A reduced payout could be ahead for these high yield dividend stocks
When investors are looking for dividend-paying stocks, they should generally avoid companies in declining industries (like big tobacco), companies that regularly pay more than 100% of their profits or free cash flow (FCF) in the form of dividends and companies that only pay high returns because their stocks have been squashed. Checking these three boxes will help you avoid some high yield traps.
But investors should also be wary of companies with changing priorities, stagnant companies and unusual dividend distribution models. Here are three high-yielding stocks that correspond respectively to these three categories – Intelligence (NASDAQ: INTC), Photocopy (NYSE: XRX), and Nintendo (OTC: NTDOY).
Intel is paying a 2.5% forward yield, its dividends have consumed only 29% of its FCF in the past 12 months, and the chipmaker has increased its payouts every year for six years in a row – and its shares are trading at only 12 times the futures earnings. But it’s cheap for obvious reasons.
A series of manufacturing missteps caused its in-house foundry to fall behind Semiconductor manufacturing in Taiwan (NYSE: TSM) in the “process race” to create smaller chips in recent years. As a result, his rival Advanced micro-systems (NASDAQ: AMD) – which subcontracts its production to TSMC – now sells more advanced chips than Intel.
Former Intel CEO Bob Swan was a former CFO who prioritized cost-cutting measures, big buyouts, and ongoing dividend payments instead of solving the company’s pressing R&D issues. Swan has also considered outsourcing more of its chips to third-party foundries like TSMC.
But Intel replaced Swan with Pat Gelsinger, an engineering veteran and former CEO of VMWare, earlier this year. Instead of abandoning Intel’s foundry business, Gelsinger doubled the expansion of the company’s U.S. factories with a $ 20 billion investment. Intel is also said to be interested in buying GlobalFoundries, AMD’s former foundry partner, for $ 30 billion to accelerate these efforts. But it will take a lot more spending for Intel to catch up with TSMC.
TSMC has a lead of about two generations of chips and is set to spend $ 100 billion over the next three years to increase its overall capacity. Therefore, investors shouldn’t be surprised if Intel cuts its dividend – which consumed $ 5.6 billion in cash last year – to save its core business.
Xerox pays a forward return of 4.4% and has spent only 53% of its FCF on these payments in the past 12 months. The stock trades at just ten times the earnings over time. However, Xerox has not increased its dividend since 2017, and its two main businesses could be in serious trouble.
Sales of Xerox equipment, which consists primarily of printers, copiers and their associated supplies, have declined in recent years due to long upgrade cycles, the rise of paperless offices and the competition from generic ink and toner suppliers. As a result, its after-sales activity, which generates income from installation, maintenance, financing and additional services, has also withered.
Activist investor Carl Icahn tried to push Xerox to buy HP (NYSE: HPQ) last year, but HP resisted the hostile offer and Xerox gave up earlier this year. Meanwhile, Xerox’s FCF growth remains muted, especially when you exclude the cash it has earned from exiting its Fujifilm (OTC: FUJIY) joint venture in 2019:
Analysts expect Xerox revenue and profits to rise 3% and 33%, respectively, this year from an easy comparison to the pandemic. But next year, its revenue is expected to fall by 2% as it resorts to aggressive cost-cutting measures and buyouts to increase its EPS – which could rise by 18%.
Xerox likely won’t be cutting its dividend anytime soon, but the secular decline in its core business suggests it would be smarter to cut its dividend – which consumed $ 230 million in cash last year – and invest in new ways to develop long-term income again.
Nintendo has paid a rolling 3.6% return over the past 12 months. However, the semi-annual dividends of the Japanese gaming giant fluctuate each year based on its operating and net profits.
Specifically, Nintendo’s interim dividend is equal to 33% of its consolidated operating profit in the first half of its fiscal year, while its year-end dividend is based on the higher of double digits: 33%. of its consolidated operating profit or 50% of the net profit attributable to its shareholders.
This payout structure has enabled Nintendo to pay out higher consecutive annual dividends over the past four years. But all of this growth can be attributed to the launch of its popular Switch console in 2017.
Nintendo’s revenue jumped 34% in fiscal 2020, which ended in March, as its net profit jumped 88%. This growth has been in part attributed to the pandemic, which has drawn more players to the Switch and popular games like Animal Crossing: New Horizons and Mario Kart 8 Deluxe.
But this year, Nintendo expects its revenue and profits to drop 9% and 29% respectively, as the pandemic passes, new consoles compete for attention, and the global chip shortage limits. its production of new switches. Nintendo’s new Switch OLED console might cushion the blow when it arrives in October, but its weaker profits will inevitably lower its total dividends this year.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.