Warning: This Dividend Could Be in Danger

When we see a dividend about to hit the skids, it’s our job to let you know.

Like when we signaled that RadioShack’s (RSH) dividend was going to implode. It did, in short order.

And again, with Nokia (NOK). We warned you in September not to expect distributions much longer. Sure enough, two weeks ago, it killed off its dividend.

[wp_ad_camp_1]The overt danger with such companies is that they look like compelling investments for one reason and one reason only:

They’re cheap as dirt.

Just take a look at RadioShack’s valuation before July’s dividend cut.

Its price-to-sales (P/S) ratio in June clocked in at a big, fat 0.08.

It doesn’t get much lower than that.

And Nokia, before calling its own dividend program quits, was trading almost as cheaply with a P/S ratio of 0.35.

Some investors misconstrue these valuations as a bargain – an opportunity for a value play plus the cash benefit of a dividend. Who knows, they could surprise to the upside, after all.

Big mistake. These companies aren’t full of potential… they’re full of disaster.

With zero earnings, pathetic revenue, ballooning debts and dwindling consumer relevance, the low valuations are nothing more than a trap – where today’s bargain is the realized loss of tomorrow.

And so it goes with this week’s most dangerous dividend: Best Buy (BBY).

Good Intentions and Goodbye Dividends

With Best Buy’s 4.1% yield and bargain bin stock price, it’s no wonder unwary dividend investors might get suckered into holding shares.

Don’t be one of them, because apart from yield and valuation, there’s one overwhelming reason to steer clear: Best Buy’s dividend is headed toward extinction.

Just take a look at the company’s cash reserves. They’re dwindling – down 54% over the last quarter, from $680 million to $309 million.

And with a dividend that costs the company about $225 million a year, there’s a good chance management will find a better use for that money elsewhere.

In fact, when asked about the future of its dividends during last quarter’s shareholder conference call, CEO Hubert Joly didn’t do much to bolster confidence:

“The question of [whether] given the decline in the cash flow… we are committed to continuing the dividend – we’ve not made any decision one way or the other on that.

What we’ll be doing, of course, is assessing future cash flow and investments, in particular going into fiscal 2014, which will be a year of transition. But at this point in time, there is no intention to suspend the dividend. But, of course, we want to carefully look at this.”

Well, the road to Hell is paved with good intentions. And Best Buy is well on its way – just don’t expect its dividend to arrive in tow.

As a Morningstar analysis puts it, “Best Buy’s financial health is reflective of a retailer faced with an increasingly weak competitive position.”

In other words, the company is dying a slow death. And it’s going to have to engage in increasingly desperate efforts to keep itself on life support. Sooner or later, that’ll mean sending its dividend program out to sea.

Bottom line: Best Buy (BBY) has “sucker’s bet” written all over it. Neither its bargain-basement valuation, nor its above-average yield is enough to make up for the fact that the company is on a collision course with obsolescence.

Safe investing,

Ryan Anders

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Source: Dividends and Income Daily