This Well-Known Stock’s Dividend Is In Danger
There are a lot of uncertainties in today’s markets. Worries about China, low oil prices, and fears of deflation are all taking their toll on investors.
At the same time, more Americans than ever before are close to retirement age. According to the U.S. Census Bureau, more than 15% of the U.S. population will be age 65 or older by 2020. And most of those retirees will be relying on steady income from their investments to support them through their golden years.
So it is becoming increasingly important to regularly evaluate your portfolio holdings and make sure that all of your investments — especially the dividend payers — are safe.
Of course, this problem isn’t just one for people done with their careers. Income investing is also crucial to anyone saving for retirement (or any other long-term goal). Income compounding is one of the only tried and true ways to build a nest egg.
But you can’t compound anything if one day your stocks stop paying you a dividend. And some of the most popular dividend payers have started showing signs of trouble…
Slowing Growth Is Signaling Trouble For This Industry
One of the most popular industries that income investors turn to for stable dividend checks is consumer staples.
It makes sense, doesn’t it? In good times and bad, people need to buy groceries, toiletries, health care products and a million other goods you find lying around your house.
The companies that sell those products — such as Procter & Gamble (NYSE: PG), Clorox (NYSE: CLX) and Colgate-Palmolive (NYSE: CL) — have all been in business for a very long time. They aren’t known for rapid expansion or high growth. But they do incredibly great business, raking in large profits.
So the idea that they share that wealth with their shareholders shouldn’t be a surprise.
Unfortunately, there’s a big problem brewing. Some — but not all — of these kinds of companies have hit a sort of wall. Sure, they still bring in enormous, steady profits. But in order for them to continue paying and growing their dividends, they need to be growing those profits.
Domestic markets are not seeing the kinds population growth rates they saw back when these blue chips were up-and-comers. And penetration into new markets can only get them so far.
That’s not to say you should sell all of your consumer staples stocks. With low — or no — yields to be found anywhere else, many of these companies are still great sources for income. But digging deeper shows that some reliable dividend payers may have cuts in their future.
Now, it’s quite likely that in the next year or two, any of these kinds of positions will be just fine. These companies are nothing else if not stable and low risk. But eventually the indisputable fact that they are raising their dividends at a faster pace than they are growing their income is going to spell bad news for those future payments.
Which stock to I think has the highest risk for a future dividend cut in the consumer staples industry? Kimberly-Clark Corp. (NYSE: KMB).
Before I get into the reasons why KMB’s dividend is at risk, it’s important to note right up front that this situation could change going forward. The company has historically shown itself to be a well-run business. It has brands that are irreplaceable, like Huggies, Kleenex and Depends. That’s why these periodic checkups are crucial to anyone either saving for retirement or already relying on these dividend checks to enjoy their own retirements.
Unfortunately, as the situation at hand shows, now is not Kimberly-Clark’s best time.
This analysis is simple. The root of any dividend safety check is a look at a company’s free cash flow.
Here, I’m talking about the actual money that made it into the company’s hands, after you take out its spending plans. The simple formula is operating income minus capital expenses. It’s as simple as that.
Over the last 12 months, KMB had a free cash flow of $1.1 billion — not a small amount, to be sure. That seems like a healthy business.
However, over that same period of time, the company has spent $1.3 billion in dividend payments.
It doesn’t take a mathematician to see that those numbers don’t add up.
What’s worse is that the company has increased its dividend far too fast. Over just the last five years, its annual payment went from $2.64 per share to $3.52 per share. Ordinarily, that’s exactly the kind of growth you’d want from a dividend-paying stock. Unfortunately, with stagnant bottom-line growth, it just can’t afford to keep that pace up for much longer.
While Kimberly-Clark is one of the best consumer staples businesses in the world, its dividend is in a precarious position right now. If you own it, I recommend you sell it. If you don’t, I recommend you don’t enter into a position here.
Risks To Consider: While there’s no financial risk to avoid investing in a stock, there is the risk of losing opportunity. If the company can recover and begin growing its business in a serious way, it could easily continue paying its growing dividend. So in five years’ time, you might consider that a lost opportunity. But with the way things look right now, the safe move is to stay away.
Actions To Take: If you own shares of Kimberly-Clark Corp. (NYSE: KMB), your dividend is at risk. It might not be today or even next year, but unless something changes, you could face the possibility of a serious dividend cut — one that would not only end your cushy income checks… but also send other investors fleeing and your shares falling. If you are in a position in KMB, exit it now. As long as you held it over the past few years, you should be locking in a nice gain. Take that off the table.
But stay tuned. In my next article I’ll present the other side of this consumer staples analysis — the safest dividend in the consumer staples industry.
Editor’s Note: My colleague Nathan Slaughter has discovered a small group of dividend payers that he thinks every single income investor should own. He calls them his High-Yield Hall of Fame. These stocks have outlasted wars, depressions, recessions, financial panics and more — while still raising dividends year after year. To learn more about these elite income stocks, click here.