Two high dividend stocks facing dividend cuts. Put them on the watchlist.

Two high dividend stocks facing dividend cuts.  I took notice of Windstream (WIN) and First Energy (FE) the other day when I noticed their dividend yields in the 6-7% range.  These two companies are priced less than 20 times their 5 yr. average earnings which makes them possible investments.  However, both are paying out more in dividends than they are earning.  That is troubling because they won’t be high dividend stocks for long.  Their share prices will likely decline once the managements cut their dividends.  Both might prove to be high dividend stocks in future if their market prices drop more into the value territory of below 12 times average earnings and they keep a sustainable dividend.  Check them out in detail below.

Windstream (WIN)  POSSIBLE INVESTMENT, but wait until after the dividend cut

Market price: $12.58

Shares: 509.98 M

Dividend yield: 7.7% with a quarterly dividend of $0.25

ADJ EPS adjusts for changes in capitalization (share issuance or buybacks)

            EPS     Net inc.           ADJ EPS

2006    $1.25   $545.3 M         $1.07

2007    $1.94   $917.1 M         $1.80

2008    $0.93   $412.7 M         $0.81

2009    $0.76   $334.5 M         $0.66

2010    $0.66   $310.7 M         $0.61

5 yr. average earnings equals $0.99 per share.  12 times the 5 yr. average earnings equals $11.88.  20 times the 5 yr. average earnings equals $19.80.  Windstream is trading at 12.7 times the 5 yr. average earnings.  That makes it eligible for investment, but it is going to have to cut its dividend or issue more shares.  The company is paying over $1.00 per share in annual dividends, but it is only earning $0.61 per share.  I wouldn’t buy WIN at $12.58.  I would wait for the dividend cut and the market price to drop below $11.88 before reconsidering a purchase of WIN.

I have not closely examined Windstream’s dividend record, earnings power, or its balance sheet.  I will if the market price drops significantly below $11.88.

First Energy (FE)  POSSIBLE INVESTMENT, but wait until after the dividend cut

Market price: $37.00

Shares: 418.22 M

Dividend yield: 6.0% with a quarterly dividend of $0.52

ADJ EPS adjusts for changes in capitalization (share issuance or buybacks)

            EPS     Net inc.           ADJ EPS

2006    $3.81   $1,254 M         $3.00

2007    $4.22   $1,309 M         $3.13

2008    $4.38   $1,342 M         $3.21

2009    $3.29   $1,006 M         $2.41

2010    $2.57   $784 M            $1.87

5 yr. average earnings equals $2.72 per share.  12 times the 5 yr. average earnings equals $32.64.  20 times the 5 yr. average earnings equals $54.40.  First Energy is trading at 13.6 times the 5 yr. average earnings.  That makes it eligible for investment, but it is going to have to cut its dividend or issue more shares.  The company is paying a $2.08 per share in annual dividend, but it is only earning $1.87 per share.  I wouldn’t buy FE at $37.00.  I would wait for the dividend cut and the market price to drop below $32.64 before reconsidering a purchase of FE.

I have not closely examined First Energy’s dividend record, earnings power, or its balance sheet.  I will if the market price drops significantly below $32.64.

DISCLOSURE: I don’t own either of these common stocks.

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Published in: on April 7, 2011 at 10:14 am  Leave a Comment  

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