Dividends are great because it provides a steady stream of revenue to investors on top of the appreciation of the stock price.
However, just because a company offers an attractive dividend doesn’t mean that investors should automatically buy. There are still many other considerations that investors should evaluate.
Here are two dividend stocks that investors should probably avoid right now:
AT&T (NYSE: T)
It is well-documented that AT&T has too much debt. As of August, the telecommunications giant’s long-term debt totaled $153 billion and short-term debt totaled $15 billion. The debt-ratio stands at a whopping 0.31, which is not good.
Most of the debt was racked up via ill-advised acquisitions into the entertainment/media industry.
First, there was the $49 billion acquisition of DirectTV, which virtually everyone on Wall Street said was a bad deal. Then, AT&T scooped up Time Warner for $85 billion.
The problem with AT&T isn’t just with the debt, but rather the lack of growth.
AT&T has struggled to maintain DirectTV subscribers. The company apparently wants to sell DirectTV for less than $16 billion (this is after paying $49 billion to buy it just a few years ago).
TimeWarner has faced numerous headwinds due to the pandemic. Movie releases have been delayed and television ad revenue has plummeted.
The company pinned its hopes on the launch of streaming platform HBO Max with a $4 billion investment. HBO Max confused many users of HBO Now, the other streaming platform. HBO and HBO Max have a combined total of 36 million subscribers. By comparison, Disney Plus has 60 million subscribers. HBO Max is still not available on Amazon Fire TV or Roku, an obstacle to grwoth.
Part of the problem with HBO Max is that it costs more than Disney Plus and other streaming platforms. AT&T is learning the hard way that just because you have the TV show “Friends” on your streaming platform doesn’t mean that your actual friends will buy it.
And now that Sprint and T-Mobile (Nasdaq: TMUS) have combined mobile services, there are now three big wireless communications players along with AT&T and Verizon (NYSE: VZ). That’s a more competitive space.
During its most recent earnings call, AT&T revealed a 9% decline in revenue. Shares of AT&T stock are down more than 27% in 2020. While that might seem like a good deal for value investors (it does have a price-to-earnings ratio of 17), the company’s return on equity and net profit margin are both too low.
Brandon Nispel of KeyBanc Capital markets downgraded AT&T recently and wrote that the stock is “competitively challenged.”
While AT&T’s 7.61% dividend looks appetizing, the stock will continue to lose value. A combination of debt and low growth is hurting the company. Investors should avoid this stock.
ExxonMobile (NYSE: XOM)
It’s been an awful year for the energy sector, and for ExxonMobile especially. The oil and gas giant lost more than $1 billion in the second quarter. By contrast, the company had a profit of $3 billion during the same period in 2019.
A big reason behind the decline in the energy sector in 2020 is the pandemic. With fewer people traveling by car or airplane, demand for oil is significantly down. This means that supply has greatly exceeded demand.
It doesn’t take a basic economics 101 class to know that when supply exceeds demand, prices fall. That’s exactly what has happened in 2020. The price of crude oil has dropped by about 30% this year.
That brings the conversation to ExxonMobile. The company used to be the largest oil company in the United States for more than a century. Last week, Chevron (NYSE: CVX) dethroned ExxonMobile for the first time due to market value.
ExxonMobile does boast a juicy 7.9% dividend yield. However, the stock price has fallen more than 50% in 2020.
Unlike its competitors, ExxonMobile has done a horrible job diversifying revenue streams beyond its traditional oil business. The company invested heavily in the last decade in different oil drilling projects that went bust and left the company drowning in debt.
ExxonMobile warned regulators that its upcoming earnings for the third quarter will be lower than what analysts projected. Bad debt and a declining business means that cash flow is a real issue with ExxonMobile. If cash flow continues to be a problem, the company could lower its dividend yield. There are also plans to layoff workers in order to keep its dividend in place.
However, most savvy investors realize that ExxonMobile is a bad bet. They are turning their attention to solar and wind companies, which have seen incredible growth in 2020.
Until ExxonMobile can become profitable, investors should avoid.