Sunday, March 29, 2015

Why POT and VZ are not Dividend Machines

I am not enamored with the market and I cannot put my finger on it.   Alfred Ferol tells me it is time for a pause.   Lots of things are influencing the market including people’s moods.  You don’t have to invest every day, he points out.

Are we scared of a 25 basis point increase in rates?  Maybe it is the unrest in the Middle East that is to blame for the malaise and the fear.  Or perhaps the strong dollar with its negative impact on earnings has the market feeling gloomy.

In that frame of mind, I looked at ten stocks that I might consider as a 2015 Dividend Machine stock.  Several calls were taken last week and I have money to invest.  I looked at these ten stocks not just as potential Dividend Machines but also as possible investments that might not quite make the Dividend Machine grade but are worthy of investment.  I decided to profile two stocks with the view of “why I don’t want to invest in either one.”

Dividend Machine Fundamentals of VZ and POT

Of these ten stocks, the two stocks that even come close enough to consider my investment are Potash symbol POT and Verizon symbol VZ.

Both of these stocks make more money in EPS than they pay out in dividends and their yields are around 4.5%.   Let’s look at these stocks further.

Verizon has a solid 5 year dividend history.  They have increased the dividend an average of 3.16% per year.   This is not quite enough to make VZ a Dividend Machine as we require at least a 4% average increase per year over the past five years.

Potash has a really robust dividend increase history.   If you look at the past three years, the dividend has increased from $.14 to $.38 per quarter.  That is an average annual increase of 56%.   But, POT has a history of cutting the dividend.   They clearly have tried to maintain a payout during difficult times but they will reduce the dividend if needed to maintain the integrity of their balance sheet.

POT has a D/E ratio of only .37.   VZ has a D/E ratio of 8.99. 

The Tables below show the Dividend Machine fundamentals of these two stocks.

My Take:

I value balance sheet integrity a great deal and feel that I would rather pick a stock with a D/E ratio of less than one rather a stock with a D/E as high as VZ’s.  However, I am worried about these value stocks like POT that deliver a nice dividend now but if things get worse, they may not deliver the same income as I expect.

I will pass on both of these stocks for now.

Disclosure:  Long POT with Calls