Dividend Depot: These Dividends Could be in Trouble This Year

High dividend yields are enticing, but dividends aren't the only thing to focus on.
Anthony RussoFeb 10,2021,21:35

Last year was rough for dividend lovers. While some stocks have now resumed paying out their dividends, others with high yields could potentially be forced to suspend them in 2021 if the coronavirus pandemic doesn't end soon.

Dividends Mean Guaranteed Income

A big reason why shareholders love dividends is that it provides them a steady stream of revenue, even if the stock isn’t always earning appreciation.

One example of that is biotech firm Pfizer (NYSE: PFE), whose stock has dropped 3% in the last twelve months despite the company developing the first commercialized vaccine against Covid-19. While the stock could still see a big boost after it potentially reports surging revenues from its Covid-19 vaccine--investors don’t just flock to Pfizer for solely that reason. Instead, investors are attracted by Pfizer’s 4.46% dividend yield.

Pfizer was also profitable in 2020. Others, meanwhile, continued to pay out big dividends to shareholders despite suffering losses in 2020.

As a result, some companies that have been paying out those large dividends could be forced to put them to a halt this year if operations fail to experience much improvement.

The pandemic isn’t over yet and will likely continue to be a major concern for the next several months.

Below are a few stocks whose big dividends could be in jeopardy in 2021.

Sound the Alarm on Two Oil and Gas Giants

For the most part, it has been a brutal last 12 months for the energy space. Amid the pandemic, fewer people have been traveling by cars or airplanes, bringing the oil demand down significantly.

As a result, gas and oil giants including Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX) posted full-year 2020 net losses of $22.4 billion and $5.5 billion respectively. Both companies were profitable in 2019.

Despite the abysmal 2020, oil and gas prices have been rallying since November on encouraging vaccine news, economic stimulus hopes, as well as production cuts from OPEC+ members.

That has helped boost the stock prices of Exxon and Chevron in the past few months, whose dividend yields now sit at 6.68% and 5.67%.

While you should have some level of concern about both dividends this year, you should be more worried about Cheyron thanExxon.

Although Exxon’s fourth-quarter results were disastrous, the company expects to cover its dividend with free cash flow after failing to do so for the second straight year. It also intends on defending its dividend even if gas prices dip again.

“These expectations are valid at Brent prices of $50 per barrel and at the lowest annual Downstream and Chemical margins during 2010-2019,” Exxon said in its financial report.

Further “Should the price and margin environment fall below these levels, capital expenditures can be further reduced to enable dividend coverage and maintenance of balance sheet strength at Brent prices of approximately $45 per barrel.”

Meanwhile, there’s been some disappointment surrounding Cheyron after it declined to raise its first-quarter dividend, even though its debt isn’t as high when compared to its peers.

“The absolute metrics do not make for great reading,” Alastair Syme, a London-based analyst at Citigroup Inc., wrote in a note, as cited by Bloomberg last week.

“The simple message is that Chevron (and integrated oil company peers) is not well suited to a sub-$50 oil price world.”

It’s hard to say what’ll happen to gas and oil prices in the next several months but President Joe Biden doesn't exactly adore the fossil fuel industry. So, long term, these stocks may not be the best bets--even with the high dividend.

But keep an eye on both Chevron and Exxon in the coming months and see what actions are taken with their dividends after a brutal 2020. But it's probably best to avoid both Chevron and Exxon right now, whose stocks have risen 32% and 56% respectively since the end of October.

AT&T’s Dividend Could be Jeopardy if it Can’t Cut Debt

In November, I made the case to buy tech conglomerate AT&T (NYSE: T) on stock wars despite its high debt.

Why? I was a fan of its growing wireless business, and its streaming service HBO Max. In addition, its stock price was trading near its early pandemic lows, representing a solid buying opportunity.

While the stock experienced some big gains in December, it’s now back to trading at its pandemic lows again.

Overall, AT&T lost $5.4 billion in 2020, in contrast to a net income of $13.9 billion in the previous year.

But the biggest issue for AT&T in the past 12 months has been debt pile—which wasn’t just caused by the pandemic. Rather, the company has made ill-advised acquisitions including its $49 billion purchase of satellite service provider DirecTV in 2014.

Now, to tackle its debt, AT&T is reportedly considering selling a stake in DirecTV. In January, Reuters reported that private equity firm TPG had entered “exclusive” discussions to purchase a minority stake in DirecTV that would help the telecom giant slash its debt to near $150 billion.

While AT&T has committed to its dividend, the high debt remains a concern, which the company will have to address soon. The company finished 2020 with a net debt to adjusted Ebitda ratio of 2.7X.

But no doubt, investors will be enticed by the stock’s 7.23% dividend yield going forward.

Prudential Financial is a Boom or a Bust

Prudential Financial (NYSE: PRU) is another high dividend stock that could be at risk in 2021.

In the first half of 2020, the insurance and investment management provider suffered hefty losses. But after implementing a cost reduction plan at the beginning of 2020, the company saved $215 million at the end of the year, according to chairman and CEO Charlie Lowrey. As a result, Prudential was profitable in each of its last two quarters in 2020.

But still, its last two quarters weren’t enough for Prudential to turn a full-year profit, as its net loss topped $374 million in 2020.

The good news is it appears Prudential has put the worst behind-- at least for now. Based on current estimates, analysts expect Prudential to earn $2.67 per share in the first quarter and $11.58 per share for the full year of 2021.

Meanwhile, before the pandemic, Prudential’s earnings had not experienced much growth. In 2018, Prudential's earnings were nearly cut in half and then rose by just 3% the year after.

In the past twelve months, the stock is down to 13% date. While there could be some value here, investors may want to act fast if they want this stock solely for its dividend. Investors will need to purchase shares of Prudential before Feb. 12 to qualify for its next dividend, which will be paid out to shareholders in March.

If you were going to buy one stock on this list for dividends then I would look to buy Prudential. But the old adage of “boom or bust” may apply to Prudential when it comes to its dividend and potential stock market appreciation it sees.

Currently, Prudential’s dividend yield sits at 5.49%.

The Bottom Line

High dividends are great but they are not the only thing to consider.

The stock's performance outlook is the most important thing to consider, and not all dividends are sustainable--or should be. Some companies woould be better off cutting their dividend and using the capital to reinvest in fturue growth.

Currently, the pandemic is still weighing down on many companies’ earnings. Some desperately need the pandemic to come to an end and that won’t happen until the Covid-19 vaccines hit critical mass. That could take until the end of the summer or the fall.

Nevertheless, high dividend stocks will always be enticing, but investors need to consider other factors well.

Topics:Pfizer, AT&T, Exxon Mobil, Chevron, Prudential Financial.