Although dividend stocks offer stability in uncertain times, not all of them do not possess strong fundamentals. Such stocks have a considerable risk of reducing their dividend payouts, which could also send their share prices into a tailspin.
So, it could be wise to steer clear of risky dividend stocks Realty Income Corporation (O) and Washington Trust Bancorp, Inc. (WASH). But International Business Machines Corporation (IBM) could be a worthy addition to your watchlist, considering its relatively steady fundamentals. Let’s discuss this in detail.
In April, the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose 0.4% month-on-month and 4.4% year-over-year. The core PCE, which excludes volatile food and energy costs, rose 0.4% for the month and 4.7% from the previous year.
The central bank has bumped the target fed funds rate from 0%-0.25% to 5%-5.25% since March last year, the highest level since 2007. Despite raising rates ten times, inflation remains well above the Fed’s 2% target. Although Fed officials have hinted at skipping an interest rate hike this month, they have also suggested that rate increases would resume later in the year.
To effectively bring inflation back to the Fed’s sustainable target, the International Monetary Fund (IMF) suggests that the federal funds rate should remain high until late 2024.
According to IMF, the Fed funds rate is expected to reach its highest point this year at 5.4%. Still-elevated inflation, higher interest rates, and prevailing recession risks are expected to keep the stock market in a tight spot.
While dividend stocks are known for providing a stable income stream during unpredictable times, not all possess solid fundamentals, with a high risk of reduction in payouts or a significant drop in their share prices.
Hence, avoiding weak dividend stocks O and WASH could be wise. However, IBM could be worth adding to your watchlist due to its stable fundamentals.
Let’s discuss the featured stocks in detail.
Stocks to Sell:
Realty Income Corporation (O)
O is a Real Estate Investment Trust (REIT) that acquires and manages single-unit freestanding commercial properties. It engages in long-term net lease agreements with commercial clients and owns and operates over 12,237 diverse commercial properties, covering approximately 236.8 million leasable square feet.
O has a record for raising its dividends for 26 consecutive years. It pays a $3.06 per share dividend annually, translating to a 5.17% yield on the current price level. Its dividend payments have grown at a 4.1% CAGR over the past three years. The company’s four-year average dividend yield is 4.29%.
However, O’s fundamentals tell a different story.
In terms of trailing-12-month non-GAAP P/E, O’s is trading at 41.28x, 61.8% higher than the industry average of 25.51x. Its trailing-12-month Price/Sales multiple of 10.72 is 146.7% higher than the industry average of 4.35x. In addition, O’s trailing-12-month EV/EBITDA of 19.18x is 16.2% higher than the industry average of 16.51x.
O’s trailing-12-month AFFO yield of 6.63% is 9.1% lower than the 7.3% industry average. Likewise, its trailing-12-month asset turnover ratio of 0.07x is 43.1% lower than the industry average of 0.13x.
For the first quarter (ended March 31, 2023), O’s expenses increased 18.9% year-over-year to $723.66 million. Net loss attributable to noncontrolling interest increased 83.7% from the year-ago value to $1.11 million. As of March 31, 2023, the company’s total liabilities were $21.71 billion, compared to $20.83 billion as of December 31, 2021.
For the next fiscal quarter ending September 2023, analysts expect O’s EPS to decrease 2.9% from the prior year’s quarter to $0.34. O has declined 7.2% year-to-date and 13% over the past year to close the last trading session at $59.24.
O’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
O has an F grade for Value. It is ranked #23 out of 30 stocks within the F-rated REITs - Retail industry.
Click here to see the other ratings of O for Growth, Momentum Sentiment, Stability, and Quality.
Washington Trust Bancorp, Inc. (WASH)
WASH is a bank holding company of The Washington Trust Company of Westerly. Its Commercial Banking segment engages in lending, cash management, and other banking activities. The Wealth Management Services segment offers investment management, financial planning, and personal trust and estate services.
WASH pays a $2.24 per share dividend annually, translating to an 8.63% yield on the current price level. Its four-year average dividend yield is 4.67%. The company has increased its dividends for 26 consecutive years, and its dividend payments have grown at a 6.7% CAGR over the past five years.
Despite a high-yielding dividend, the company is seemingly experiencing some problems.
In terms of forward non-GAAP P/E, WASH is trading at 9.69x, 15.1% higher than the industry average of 8.42x. Moreover, its forward Price/Sales and Price/Book multiples of 2.21 and 0.93 are trading at 6.57% and 0.67% higher than the industry averages of 2.08 and 0.92, respectively.
The stock’s trailing-12-month Return On Total Assets (ROTA) of 0.99% is 11.7% lower than the 1.12% industry average. Also, its trailing-12-month cash from operations of $85.54 million is 41.9% lower than the $147.20 million industry average.
For the first quarter that ended March 31, 2023, WASH’s total non-interest income decreased 22.6% year-over-year to $13.28 million. Its net income declined 22.3% year-over-year to $12.81 million, while its EPS worsened 21.3% from the prior year’s period to $0.74.
Furthermore, as of March 31, 2023, WASH’s total liabilities stood at $6.39 billion, compared to $5.33 billion as of March 31, 2022.
The company’s EPS is expected to decrease 34.8% year-over-year to $2.68 for the fiscal year ending December 2023. Likewise, analysts expect WASH’s revenue for the ongoing year to decline 8.6% year-over-year to $199.78 million. Moreover, the company failed to surpass the consensus revenue estimates in three of four trailing quarters, which is disappointing.
Over the past six months, WASH has plunged 47.5% to close the last trading session at $25.97.
WASH’s bleak outlook is reflected in its overall D rating, equating to Sell in our POWR Ratings system. It has a D grade for Growth, Quality, and Sentiment. The stock is ranked #61 out of 67 stocks in the F-rated Northeast Regional Banks industry.
Click here to access additional WASH ratings (Stability, Value, and Momentum).
Stock to Watch:
International Business Machines Corporation (IBM)
IBM provides hybrid cloud, Artificial Intelligence (AI), and business services. It offers integrated solutions and products that utilize data and information technology across various industries and business processes. The company operates through four segments, Software; Consulting; Infrastructure; and Financing.
On May 17, IBM unveiled its SaaS offering, IBM Hybrid Cloud Mesh. The company’s groundbreaking connectivity service would empower clients to optimize their hybrid multi-cloud infrastructure. This move could propel IBM's success and growth while delivering substantial benefits to businesses.
Additionally, on May 3, IBM announced that Cadence Design Systems, Inc. (CDNS) is leveraging IBM Cloud HPC to accelerate the development of its chip and system design software. The collaboration should bolster IBM's competitive edge, tackling compute-intensive obstacles and attaining quicker insights.
In terms of forward non-GAAP P/E, IBM is trading at 13.75x, 35.6% lower than the industry average of 21.36x. Its forward EV/EBITDA of 10.58x is 26.1% lower than the 14.30x industry average.
IBM’s trailing-12-month EBITDA margin of 20.87% is 152.7% higher than the 8.26% industry average. Likewise, the stock’s trailing-12-month levered FCF margin of 16.43% is 129.1% higher than the 7.17% industry average.
IBM has raised its dividends for 23 consecutive years. It pays a $6.64 per share dividend annually, translating to a 5.11% yield on the current share price. Its dividend payments have grown at a 2.2% CAGR over the past three years, and its four-year average dividend yield is 4.97%.
For the fiscal first quarter that ended March 31, 2023, IBM’s gross profit grew 2.4% year-over-year to $7.51 billion. Its income from continuing operations rose 41.1% year-over-year to $934 million. The company’s net income grew 26.5% from the year-ago value to $927 million, while its EPS increased 24.7% year-over-year to $1.01.
The consensus revenue estimate of $62.26 billion for the fiscal year ending December 2023 reflects a 2.9% year-over-year improvement. Likewise, the consensus EPS estimate of $9.44 for the ongoing year indicates a 3.4% rise year-over-year.
Shares of IBM have plummeted 6.9% over the past year. However, the stock has gained 2.7% over the past month to close the last trading session at $129.82.
IBM’s relatively stable fundamentals are apparent in its POWR Ratings. The stock has a B grade for Growth and Quality. It has ranked #29 in the 82-stock Technology - Services industry.
In addition to the POWR Ratings I’ve just highlighted, you can see IBM’s additional ratings here.
What To Do Next?
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IBM shares were trading at $133.02 per share on Friday afternoon, up $3.20 (+2.46%). Year-to-date, IBM has declined -3.12%, versus a 12.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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