Wolfe Research has issued a stark warning to income investors, identifying several high-profile companies at risk of dividend cuts due to financial pressures. Chief investment strategist Chris Senyek’s screen highlighted firms with yields above 3.5% and concerning metrics like high payout ratios or leverage.
Among the companies flagged are Nike, battling recent struggles; PepsiCo, despite a recent payout increase; Blackstone, facing private market liquidity concerns; and United Parcel Service, currently undergoing a major turnaround.
Income investors, brace yourselves: several well-known companies are facing the looming threat of dividend cuts, according to a recent warning from Wolfe Research. For those who rely on these payouts, a reduction or suspension means less disposable income or capital to reinvest in the market, a concerning prospect given current economic uncertainties.
Companies often resort to such measures when grappling with financial strain. We've seen examples this year, such as Whirlpool's decision in May to suspend its dividend to tackle debt amidst a "recession-level industry decline." Flowers Foods and LyondellBasell Industries also trimmed their payouts. To help investors sidestep potential future cuts, Wolfe's chief investment strategist, Chris Senyek, advises scrutinizing balance sheets for high debt levels and above-average dividend payout ratios relative to profits.
Senyek's rigorous screening process identified stocks with yields exceeding 3.5% that also met at least one of these criteria: a payout ratio above 80%, dividends/free cash flow to equity coverage greater than 80%, or leverage exceeding 3.5x. Here are some of the prominent names that landed on Wolfe's watchlist:
Nike (NKE)
The athletic apparel and footwear giant, Nike, has been navigating challenging waters recently, and its dividend payout is now flagged as potentially at risk. Shares of Nike, currently yielding 3.79%, have seen a significant 32% decline year-to-date. Despite this, the company did manage to beat earnings and revenue expectations for its fiscal fourth quarter, even with a dip in sales in China. Analysts maintain an "overweight" average rating on the stock, with a projected 17% upside to its average price target, according to FactSet.
PepsiCo (PEP)
Surprisingly, PepsiCo also appeared on Wolfe's screen, even after having increased its dividend payout in June. The snack and beverage behemoth boasts a 4.14% dividend yield and is poised to release its second-quarter earnings report on Thursday. The company had previously outperformed expectations on both top and bottom lines in its first quarter. FactSet data shows PepsiCo holding an average "overweight" rating with a 16% upside to its average price target. The stock has seen only a fractional decline this year.
Blackstone (BX)
Shares of alternative asset manager Blackstone have been under considerable pressure, dropping approximately 20% year-to-date. This decline comes amidst growing concerns over liquidity within the private markets. In June, Blackstone took measures to restrict withdrawals from its Blackstone Private Credit (BCRED) fund following a surge in investor redemption requests. With a 4.01% dividend yield, Blackstone also carries an average "overweight" rating from analysts and a 15% upside to its average price target, per FactSet. The company's latest earnings are slated for July 23.
United Parcel Service (UPS)
Lastly, package delivery titan United Parcel Service, currently yielding a robust 5.95%, stands out with an 11% increase year-to-date. UPS is actively engaged in a comprehensive turnaround strategy, aiming for $3 billion in year-over-year cost savings by 2026. The company is expected to announce its second-quarter earnings by the end of the month, following an April report that surpassed both revenue and earnings estimates. Analysts have an average "overweight" rating on UPS, though its upside to the average price target is a more modest 3%, according to FactSet.
