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>>> 13 companies can't afford their big dividends


Matt Krantz, USA TODAY

December 11, 2015



http://www.usatoday.com/story/money/markets/2015/12/11/payout-ratio-big-dividends-afford/77115700/



Dividends are far from guaranteed - and they certainly aren't forever. Investors are finding this out the hard way this year - and wondering which dividends could be in trouble next.

There are 13 companies in the Standard & Poor's 500, including Frontier Communications (FTR), ConocoPhillips (COP) and casino operator Wynn Resorts (WYNN), that have paid out more in dividends than they've earned in profit over the past 12 months, according to a USA TODAY analysis of data from S&P Capital IQ. Each of these companies have dividend yields of 6% or higher - making them pretty expensive dividends to keep relative to the market as a whole, which is yielding about 2%.

When dividends rise over what a company has earned, its so-called payout ratio tops 100% and that gets investors' attention. If the situation continues, a company might need to scale back spending in other areas such as on new equipment, use up cash reserves or cut the dividend. One of the companies with a lofty payout ratio, pipeline operator Kinder Morgan (KMI), already announced this week a 75% reduction in its dividend for next year.

Investors are getting sensitive about the security of dividends since they're being cut at a rapid pace this year. So far this year, there have been 15 cuts to dividends by S&P 500 companies, an increase of 88% from last year, says Howard Silverblatt of S&P Dow Jones Indices. Two S&P 500 companies have eliminated their dividends this year, while none did so in the past two years.

Now investors are wisely watching and worrying what other companies might be paying more dividends than they can afford from their earnings.

Take Frontier Communications - a provider of telecom services based in Norwalk, Conn. The company's 8.5% dividend yield has made it a darling with income investors for years. Here's the issue, though, The company has paid dividends of $500 million over the past 12 months - a period during which it reported a net loss of $79 million. Some might argue the payout ratio is too simplistic since the company generated $1.3 billion in cash from operations during the past 12 months. Still, the company's heavy capital investment needs totaled $819 million during that time, meaning that its free cash flow is just $504 million or just about the same as what it is paying out in dividends. Frontier hasn't cut its dividend since 2011, says S&P Capital IQ.

Energy companies have dividend-dependent investors worried, for good reason. A number of energy companies have already cut their dividends this year. Crashing oil prices have made dividend payments much more onerous. ConocoPhillips' annual dividend now yields 6.1%. But the company has made dividend payments of $3.6 billion even as it's posted a net loss of $1 billion over the past 12 months. ConocoPhillips appears willing to defend the dividend by taking an ax to capital spending instead of the dividend. The company cut its capital spending by a quarter to $12.3 billion over the past twelve months from the 2014 level. It also announced this week plans to cut capital spending again in 2016.

No one benefits from Wynn Resorts' 7.2% yield more than Steven Wynn, who is the largest individual owner of the company's stock with a 10.9% stake. But the company's dividend payments are nearly four times greater than what the company earned the past 12 months.

It's important to stress while these companies' dividends outstripped profit the past 12 months, that doesn't mean the dividends will be cut. Companies can trim other costs in order to protect their dividends. The companies also have cash and short-term investments they can tap to keep a dividend going. If profits bounce back, the dividends could be no big sweat.

But such unaffordable dividends will only become more onerous the longer they outstrip profit.

S&P 500 COMPANIES PAYING OUT MORE IN DIVIDENDS THAN THEY'VE EARNED *

Company, Symbol, Dividend yield, payout ratio

Kinder Morgan, KMI, 12.1%, 329.6%

ONEOK, OKE, 11.1%, 160.3%

Williams, WMB, 8.85%, 528.8%

Frontier Communications, FTR, 8.54%, NM **

CenturyLink, CTL, 8.19%, 166.1%

Iron Mountain, IRM, 7.17%, 421.4%

Wynn Resort, WYNN, 7.15%, 359.1%

HCP, HCP, 6.29%, 437.9%

Spectra Energy, SE, 6.18%, 128.4%

Murphy Oil, MUR, 6.13%, NM

ConocoPhillips, COP, 6.11%, NM

CenterPoint Energy, CNP, 6.03%, NM

Mattel, MAT, 6.01, 169.2%



* Based on dividends and net income the past 12 months

** Company posted net loss the past 12 months

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