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What are we looking for?

Depending on an individual’s investment strategy, a large part of portfolio returns may significantly depend on dividends. Hence, it is valuable to be mindful of companies that may cut their dividends in the future due to unsustainable dividend yields. Those are companies we may want to avoid. We will do that by screening for companies that are struggling to cover their costs and whose profits have been declining over the past couple of years, but who are still raising their dividend yields.

The screen

We screen the U.S. and American depositary receipt (ADR) companies for unsustainable dividends using the following criteria:

  • Market capitalization greater than $1-billion;
  • Negative 12-month and 24-month change in the net operating profit after tax (NOPAT) metric – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • Positive one-year dividend growth and a dividend yield greater than 3 per cent;
  • Economic Performance Index (EPI) less than one. This is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. A ratio above one is key for sustainable investment opportunities;
  • Free-cash-flow-to-capital ratio. This ratio gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio, but for this screener we will focus on a ratio below 5 per cent.

For informational purposes, we have also included recent stock price and the one-year return. Please note that some ratios shown are based on an end-of-quarter reporting.

More about Inovestor

Inovestor for Advisors is a research platform based on fundamental analysis specializing in the economic value-added (EVA) method. It helps advisers quickly identify attractive investment opportunities and easily communicate them to their clients through client-friendly reports. In addition, Inovestor allows investors to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

What we found

Autoliv Inc. (ALV), a Sweden-based international automotive safety supplier, has suffered the greatest decline in price out of the companies on our list of 43 per cent over the past year. Autoliv experienced a slump in profits over the past 24 months, of -3.8 per cent, and is generating a low ratio of free cash flows to capital of 0.4 per cent. Moreover, the diminishing profit and cash levels have slightly pulled down the EPI beyond its ideal level of at least one. In such cases, companies would keep dividends stable and may even reduce them in future periods if profits do not begin to rise, however, for Autoliv Inc. dividends were increased by 3.3 per cent over the past year.

Nisource Inc. (NI), an S&P 500 member and one of the largest fully regulated utility companies in the United States, had a contrasting experience when it comes to its stock. Nisource’s stock gained 16.6 per cent in the past 12 months, giving the company the ability to raise dividends by 11.4 per cent over this period even though it is generating unfavourable free-cash-flows of -7.1 per cent.

Readers are advised to conduct further research before investing in any of the securities shown here.

Companies with unsustainable dividends

Company TickerRecent Price (US$)Market Cap (US$Mil)NOPAT Chg. 12M (%)NOPAT Chg. 24M (%)1Y Div. Growth (%)Div. Yield (%)1Yr Return (%)EPIFCF/Capital (%)
Ventas Inc.VTR-N61.99 22,103.9 -0.7-
Panasonic Corp.PCRFF-OTC8.90 20,746.4 -3.7-2.4254.23.5-41.00.8-2.3
Toyota Industries Corp.TYIDF-OTC51.32 15,932.6 -1.0-2.9123.73.1-18.90.9-1.6
Avangrid Inc.AGR-N48.30 14,925.0 -0.7-
Nisource Inc.NI-N27.42 10,210.2 -0.5-
Camden Property TrustCPT-N99.12 9,241.8 -0.2-
Whirlpool Corp.WHR-N137.55 8,803.2 -0.7-
Keppel Corp.KPELF-OTC4.49 8,137.9 -2.9-3.525.13.5-
Mazda Motor Corp.MZDAF-OTC10.96 6,902.2 -2.2-
Autoliv Inc.ALV-N76.77 6,690.1 -2.8-
Veon Ltd. Sponsored ADRVEON-Q2.45 4,285.4 -5.7-
Paramount Group Inc.PGRE-N14.26 3,324.5 -0.8-
Keppel REITKREVF-OTC0.92 3,134.8 -0.2-
Acadia Realty TrustAKR-N27.52 2,244.5 -0.2-
QTS Realty Trust Inc.QTS-N41.55 2,124.2 -0.2-
Pattern Energy Group Inc.PEGI-Q20.69 2,028.7 -0.2-
Kite Realty Group TrustKRG-N15.12 1,267.1 -0.1-

Inovestor for Advisors

Noor Hussain is an analyst and account executive for Inovestor Inc.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 12/04/24 4:00pm EDT.

SymbolName% changeLast
Ventas Inc
Avangrid Inc
NiSource Inc
Camden Property Trust
Whirlpool Corp
Autoliv Inc
Veon Ltd ADR
Paramount Group Inc
Acadia Realty Trust
Kite Realty Group Trust

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