Wolfe Research Flags Top Stocks at Risk of Dividend Cuts Amid Financial Strain

Income investors, attention: a recent analysis from Wolfe Research warns that several prominent companies could be facing dividend reductions. For those whose financial strategies lean on consistent dividend payments, a cut means less capital available for spending or reinvestment, potentially disrupting their plans.

Historically, companies under severe financial stress are often compelled to reduce their dividends, or even suspend them entirely. We've seen this play out with Whirlpool, which in May announced a dividend suspension to tackle debt and navigate what it termed a "recession-level industry decline." Similarly, Flowers Foods and LyondellBasell Industries have also trimmed their payouts this year.

To help investors identify potential vulnerabilities, Wolfe's chief investment strategist, Chris Senyek, developed a rigorous screening methodology. His search focused on stocks currently yielding above 3.5% and exhibiting at least one of the following critical indicators: a dividend payout ratio exceeding 80%, dividends/free cash flow to equity coverage greater than 80%, or an elevated leverage ratio (debt-to-EBITDA) higher than 3.5x.

Below are some of the notable companies that emerged from Wolfe's cautionary screen, indicating their dividends might be on shakier ground:

• Nike (NKE): The athletic apparel and footwear giant, currently yielding 3.79%, has experienced a challenging period, with its shares declining 32% year-to-date. While Nike recently surpassed earnings and revenue expectations for its fiscal fourth quarter, persistent sales struggles in China remain a point of concern. Despite an average "overweight" rating from analysts and 17% potential upside to its price target (according to FactSet), Senyek suggests its dividend payout is now potentially vulnerable.
• PepsiCo (PEP): Surprisingly, PepsiCo landed on Wolfe's list despite having increased its dividend payout in June. The snack and beverage behemoth, boasting a 4.14% dividend yield, is anticipated to report its second-quarter earnings this Thursday. The company demonstrated robust performance in its first quarter, exceeding both top and bottom-line forecasts. FactSet indicates an average "overweight" analyst rating and 16% upside, with the stock showing only a fractional decline year-to-date.
• Blackstone (BX): Shares of the alternative asset manager have been under considerable pressure, shedding roughly 20% year-to-date amidst growing concerns over liquidity in the private markets. In June, Blackstone announced withdrawal restrictions on its Blackstone Private Credit fund (BCRED) following a surge in investor redemption requests. With a 4.01% yield, Blackstone maintains an average "overweight" analyst rating and 15% upside, per FactSet. The company is slated to release its latest earnings on July 23.
• United Parcel Service (UPS): Sporting an attractive 5.95% dividend yield and an 11% gain year-to-date, the global package delivery giant is actively pursuing a turnaround strategy. This plan aims to achieve $3 billion in year-over-year cost savings by 2026. UPS is expected to release its second-quarter earnings at the end of the month, having reported a beat on both top and bottom lines in April. Analysts covering UPS generally assign an average "overweight" rating, though FactSet reports a modest 3% upside to its average price target.

As economic conditions continue to evolve, investors are encouraged to heed these warnings and meticulously review the dividend sustainability of their holdings, particularly for companies exhibiting the financial characteristics highlighted by Wolfe Research.