After a rough week, it’s nice to close it out on a positive note. And, going forward, I still expect dividend stocks to lead the way. But while there is certainly cause for optimism – my long-term bullish stance has not changed – I would caution investors against rushing out to buy any and all dividend stocks. Some are in clear danger of a dividend cut, as I also predicted in Tuesday’s Market360…especially energy stocks.
We’re starting to see that already, in fact. On Wednesday, Occidental Petroleum (OXY) made an 86% dividend cut. Yesterday, Apache (APA) announced an even bigger dividend cut. With APA shares down 71% in the prior month, that dividend yield had been looking tantalizingly high: over 12%! Well, now that Apache had to cut the payout 90%, that yield is more like 1.2%. Even now, you can make more than that with a Treasury bond (with, of course, less risk).
Now, the key as investors, of course, is to spot these things coming – and avoid the situation those “yield chasers” now find themselves in.
Here, for example, is how Apache measured up in my Dividend Grader even BEFORE the dividend cut was announced:
As you see, APA’s Dividend Trend was extremely weak, and its Forward Dividend Growth was looking even worse. To understand why, you need to consider a very important – yet often neglected – factor: the company’s cash flow.
During earnings season, you’re much more likely to hear about sales and profits. And for good reason: Those help you determine the stock’s growth prospects. But, when you’re talking about a dividend stock, you need to look at cash flow – because that’s actually where the payout comes from!
A lot of these oil companies right now are rating an “F” on their Cash Flow, including APA and OXY. This is the sign of a company that has dug itself a hole…one that a single profitable quarter, as APA just had, is not going to fix.
For energy companies, that hole is really a mountain of debt. The oil business is a costly one, especially for exploration and production (E&P) companies like these. In boom times, they’re eager to pump more oil – which typically requires a lot of borrowing. The company then becomes highly leveraged at higher oil prices.
That’s a big problem at times like these…when oil prices crash to $30/barrel.
And oil companies can’t pump their way out of it, since operations are so expensive. To stay afloat with what cash they do have, companies are going to pay their debtors before their shareholders. (Just like most of us will cut back on most everything else before, say, missing a mortgage payment.)
The question now is, which oil companies are in the most trouble?
FactSet recently published a list of energy stocks with the worst “long-term debt/equity.” Many of them haven’t been able to afford a dividend for some time, like Consol Energy (CNX) and Tetra Technologies (TTI).
And, according to my Dividend Grader, most of the others might be joining them soon:
I run a scan on dividend stocks every Saturday, as I have for many years. And you won’t find any of these on my Elite Dividend Payers buy list at Growth Investor. The only energy companies that did measure up, and I did recommend, were pipelines/terminals – and very few of them.
Meanwhile, I do have some dividend stocks on my Breakthrough Stocks list…where I focus on small-cap stocks with the best fundamentals. Thus, they have the best long-term growth potential.
In fact, I just recommended a brand-new one yesterday. Some of the best stocks for growth and income right now are actually tech stocks, and the one I’m targeting is a semiconductor company. Wall Street analysts expect 65% earnings growth this year, and the company delivered 172% earnings growth in 2019! Most importantly, it’s an A-rated “Strong Buy” in both my Dividend Grader and Portfolio Grader. Click here to check out Breakthrough Stocks and make sure you only own the best of the best, going forward.