OFF THE CHARTS
A monthly screen for interesting stocks*
The Dogs of the S&P/TSX 60 strategy is simple: Buy the large-cap stocks with the highest dividend yield, the premise being that the high payout reflects an intrinsically low share price. Though the strategy hasn’t panned out the past two years, it’s never gone three straight in the red. Here are 2016’s shaggiest dogs.
Potash Corp. was roughed up last year, with shares tumbling 45%. Despite this nosedive, the company maintained its dividend, resulting in its hefty 9.2% yield. With a payout that high, investors are right to ask if something’s got to give. Most start to question whether a dividend is sustainable with a payout ratio (the proportion of earnings returned to shareholders) above 60%; Potash’s ratio is currently around 76%. While the company says maintaining its dividend is its top priority, many analysts aren’t convinced. Those responding to an informal poll see a dividend cut on the horizon, possibly within the next six months.
Given the current environment for energy stocks, few investors are surprised when these companies cut their dividends. Often, they’re more surprised when firms don’t. Husky Energy is one of those companies—albeit in an unconventional way. For the foreseeable future, the integrated oil producer is paying out its dividend in the form of shares. The move saves the company cash but dilutes the stock, which, some argue, leaves shareholders no better off. Lanny Pendill of Edward Jones sees Husky’s share-based payout as a baby step to forestall a permanent payout reduction—which may yet come. “I’m not sure investors found that attractive.”
Crescent Point has already cut its monthly dividend by more than half to10 cents, yet it still boasts an oversized yield. That doesn’t concern Thomas Matthews at AltaCorp Capital, who in a November note said the cut addressed any concerns over the sustainability of the payout. Crescent Point has also lowered its costs by about 30% and slashed its 2016 capital spending plan to 15% below the 2015 level while it waits for oil prices to recover. Investors have largely bailed out of intermediate players like Crescent Point, however Matthews believes the company stands to benefit once the volatility in crude prices subsides.