Beware of stocks that pay high dividends. They may lull you into thinking they are flush with cash, and that between the balance sheet and the income statement, everything is rosy. In other words, to the discerning investor, the scrutiny shouldn’t stop at the payout.
While you may decide to go ahead and purchase high-dividend stocks, do it after you’ve looked at its underlying fundamentals and are comfortable with what the metrics show. After all is said and done, you might decide you feel good about your investment into one of these stocks, but you will be a better investor in the long run and less likely to fall into any traps or surprises.
Here’s an exercise that takes a quick look at the underlying fundamentals of stocks that draw investors with big payouts and dividends.
Big payouts
Wireless giant Verizon Communications Inc. (VZ, Financial), consumer staples veteran Kimberly-Clark Corp. (KMB, Financial) and global pharmaceutical company Novartis AG (NVS, Financial) lead their respective industries in dividend payments of higher than 3.6%. With payout ratios of 50% or higher, you know these companies don’t neglect their shareholders.
All three companies also tout attractive price-earnings ratios. But it’s important that investors also examine how long they will be able to provide long-term value and growth. Investors won't be able to overlook some of the alarming trends that are associated with these high-yield stocks, including diminishing revenue per share and long-term declines in gross and operating margins.
Verizon Communications
Who can argue with a dividend yield of 4.58%? Verizon’s dividend yield is ranked higher than 64% of companies in the Global Telecom Services industry. Its payout of 31% is higher than 97% of its peers.
In the communications services space, Verizon is in second place in terms of market cap. The wireless company holds 21.4% of the industry compared to industry leader AT&T (T, Financial), which holds 22.5% of the industry, according to GuruFocus’ industry overview pages.
Analysts estimate the wireless giant will reach revenue of $133 billion in 2020, compared to $130 billion at the end of this year. In a measure of earnings before interest, taxes, depreciation and amortization, or EBITDA, is estimated to reach $49.9 billion in 2020, up from $45.9 billion at the end of this year. Verizon hasn’t seen significant revenue growth over several years. Net income jumped this year to over $30 billion.
Its stock price has surged above historical value, according to the median price-sales chart by GuruFocus. Year to date, the stock has fallen 4%. On Tuesday, it closed up 0.76% at $51.51 a share.
Revenue per share at Verizon has declined for the last five years.
Verizon has a market cap of $212 billion. It has a financial strength rating of 4 out of 10 and a profitability and growth rating of 5 out of 10.
Kimberly-Clark
With a dividend yield of 3.72% and a payout of 77%, it’s easy to see why investors flock to this stock. Among more than 1,700 companies in the Global Household and Personal Products sector, Kimberly-Clark is in the top 80% in terms of dividends.
Kimberly-Clark holds 4.4% of the consumer packaged goods industry in terms of market cap. The leader of the industry is Procter & Gamble (PG, Financial) with 23.6%. Other companies that are larger than Kimberly-Clark include The Kraft Heinz Co. (KHC, Financial), Mondelez International Inc. (MDLZ, Financial), Colgate-Palmolive Co. (CL, Financial) and The Estee Lauder Companies Inc. (EL, Financial), according to GuruFocus' industry overview pages.
Analysts estimate the household goods giant will reach revenue of $19 billion in 2020, compared to $18 billion at the end of this year. In a measure of EBITDA, Kimberly-Clark is estimated to reach $3.69 billion in 2020, up from $3 billion at the end of this year.
The stock closed up 0.66% at roughly $106 a share on Tuesday just as it released second-quarter earnings. In three years, the stock has fallen 6%. GuruFocus’ median price-sales chart showed the stock is trading above its historical value.
It traded at 20.86 times price-earnings and 15 times forward earnings on Tuesday. It had a price-book ratio of 117.17 and a price-sales ratio of 2.02 at market close. A 15-year trendline shows the years when the company was growing revenue at a faster pace. As 2012 hit, revenue creation has been more of a challenge.
It has a market cap of $36.89 billion. GuruFocus ranks it 5 out of 10 in financial strength and 7 out of 10 in proftability and growth.
Novartis
Its dividend pays 3.6%, and is ranked in the top 11% of its peers in the same space. Its payout is over 50% and is ranked higher than 71% of Global Drug Manufacturers that compete in its space.
Novartis is among companies in the drug manufacturing sector, according to GuruFocus industry overview pages. The leaders of the industry are Johnson & Johnson (JNJ, Financial) with 26.4% of the industry and Pfizer Inc. (PFE, Financial) with 16.9%.
In three years, Novartis has watched a decline in stock value of 19%. At close on Tuesday, it saw a slight increase to $82.51 a share. GuruFocus showed its median price-sales chart, which suggested the stock closed at above historical value on Tuesday.
Analysts estimate the pharmaceutical company will reach revenue of $59 billion in 2020, compared to $53 billion at the end of this year. In regard to EBITDA, it is estimated to reach $20.9 billion in 2020, up from $17.67 billion at the end of this year. Novartis hasn’t seen significant revenue growth over several years. Net income stood at more than $7.7 billion in 2018. However, the company has struggled to mimic its growth of more than a decade ago in revenues, which have been choppy.
Novartis’ gross margin has been in long-term decline. The average rate of decline per year is a loss of 1.4%.
In addition, its operating margins have been in a five-year decline. The average rate of decline per year is a loss of 5.7%.
Novartis has a market cap of $191.48 billion. It is ranked 6 out of 10 in financial strength and 8 of 10 in profitability and growth.
