KINS - V.F. Corp. Cut Its Dividend: Yours May Be Next

Summary

• This article highlights dividend stocks whose dividends have been cut, suspended, or eliminated due to weak Dividend Safety Grades.
• Economic oscillation, declining earnings, inflation, and rising interest rates have put pressure on profits and the ability of some companies to maintain dividends.
• Both last year and this year, many companies eliminated, cut, or suspended their dividend. Consider stocks at risk this year, of suffering the same fate.
• Seeking Alpha’s Dividend Scorecard and Grading System can identify stocks with the potential risk of slashing their dividends. It’s an excellent tool that forewarns investors of dividend hazards.
• In addition to stocks like VFC or Hanesbrands, this article highlights dividend stocks whose dividends have been cut, suspended, or eliminated due to weak Dividend Safety Grades. A review of the dividend safety grade on your stocks may showcase that your stocks could be next.

We have the Intel on dividends!

Following the headline news of Intel Corporation ( INTC ) cutting its dividend by 65.8%, the stock's shares fell nearly 2.5% that day. More importantly, the stock fell more than 20% six months before the cut. Of course, this is the period that most shareholders suffer when a dividend is cut or suspended. Subsequently, Intel released a statement explaining it was a "deliberate approach to capital allocation [that] is designed to best position the company to create long-term value." This scenario played out with a number of stocks over the course of 2022 and this year. In the six months prior to the dividend cut, Hanesbrands fell more than 30%, Kingstone dropped 65%, and American Eagle Outfitters declined almost 30%. The drop in each of these stock’s share price more than wiped out the yield each of these investments generated during that period. These stocks perfectly explain why every dividend investor must assess dividend safety grades or relevant dividend metrics to measure a stock’s dividend risk before investment. No dividend investor wants to be caught owning a stock months before a dividend cut or suspension. Often, investors chase high-yielding stocks without knowing the risk, or they can be lured into the false sense of security of a company that has paid a dividend over a long period; the higher the yield, the greater the risk, so it is essential to review tell-tale metrics that indicate clear and present risk.

The search for yield in this high-interest rate environment will likely be extended after the Fed’s latest meeting , which favors another quarter-point rate hike. Recent economic data points to continued uncertainty. Stronger-than-expected economic conditions, underscoring stubborn inflation, are prompting investors to flock to dividend-paying stocks in hopes of counteracting some of the portfolio declines they experienced in 2022. Unfortunately, portfolio declines often happen during periods of climbing interest rates. According to a Wall Street Journal news report , Refinitiv Lipper data states,

"Investors poured a net $272 million into U.S. mutual and exchange-traded funds that buy dividend-paying stocks in the two weeks ended Wednesday...They added a record $48 billion to such funds in 2022 but pulled $835 million from them in January when shares of speculative companies propelled a market rebound.”

As red-hot inflation and market volatility continue punishing investor portfolios, once the Fed announces its updated Dot Plot in the March FOMC meeting, economic conditions could worsen with a price target well above 2%.

According to financial futures contracts , the market anticipates a rate increase from the December 5.1% projection to 5.37%. Additionally, as bonds mature later this year or early 2024, companies with short-term bonds will be forced to refinance at higher rates, which eats into their interest coverage and profitability. This also reduces their ability for Capital Expenditures and reinvestment or potential acquisitions. Companies with higher interest rates and cash flow concerns, slower growth, and recession fears can be driven to slash dividends. In light of the current environment, it is important for dividend investors to focus on companies with strong dividend metrics or to review dividend safety grades that can help them avoid dividend cuts.

Why Dividend Safety Matters

Dividend investors want investments that generate income streams over the long term. Amid high inflation and recession fears, dividend stocks can serve as inflation hedges and offer income to offset losses. While some dividend stocks can be much higher-yielding, not all dividend-paying stocks are created equal or pay a regular dividend. More often than not, as I noted earlier, higher-yielding dividend stocks may be at a greater risk of cuts to their dividend. Typically, stocks with high yields reflect companies choosing to distribute profits instead of re-investing in the company or paying off debt. Additionally, the high yield generally results from a declining stock price. As with bonds, as the bond price drops, the yield increases. The same inverse relationship is true with stocks.

Dividend stocks with weak factors or metrics such as payout ratios, dividend coverage ratios, interest coverage ratios, debt ratios, profitability metrics, or cash-per-share figures can signal when a dividend is at risk. So, I developed Seeking Alpha’s Quant Dividend Grades to instantly characterize each stock’s dividend strength or weakness relative to its sector. The model has demonstrated accuracy by averting 99% of dividend cuts since 2010 .

Additionally, dividend stocks rated an A+ for Dividend Growth have returned 436.54% in the past 12 years versus 302.81% for the comparable index. Knowing the dividend grades for your stock picks is crucial, especially since dividend safety is vital to a company’s ability to reward shareholders from profits.

The current economic slowdown is prompting cuts, suspension, and even some elimination of dividends. Dividend cuts typically result from a company being overleveraged with too much debt or experiencing a business downturn. The dividend stocks I am highlighting today have either been eliminated or cut or are at risk of cutting their dividends. In each case, poor dividend safety grades were highlighted. A simple click on Seeking Alpha’s Dividend grades unveils poor underlying metrics and data points undermining a dividend’s safety.

5 Stocks And Their Dividend Safety

Because top dividend stocks with excellent safety ratings and metrics can help preserve capital and make investors money on a quarterly or annual basis, they offer an ability to help combat inflation. Those that fail to pay consistent, consecutive dividends over the years prove their vulnerability when their dividends are slashed. We see the warning signs showcased in our Dividend Grades. The five stocks below that had poor dividend grades are examples of companies with early warning signals. Let’s dive in and look at the poor dividend ratings on these stocks. These signals could help investors to minimize risk.

1. V.F. Corporation ( VFC )

• Market Capitalization: $9.40B

• Quant Sector Ranking (as of 2/26): 483 out of 539

• Dividend Yield ((FWD)): 4.96%

• Quant Rating: Sell

• Dividend Safety Grade When Cut: D-

With its subsidiaries, V.F. Corporation is a Denver-based lifestyle brand offering an array of apparel, accessories, and luxury goods. Popular product names like North Face, Timberland, Vans, and JanSport, have allowed this Dividend King to pay a consecutive dividend for over 49 years. However, after recent challenges that began on the heels of the pandemic and international shipping and supply chain constraints, VFC announced cutting its longstanding dividend by 41.2%. This stock is a perfect example of how the dividend safety grade is far more important than dividend history.

Highlighted by Seeking Alpha’s warning banner, VFC has an ‘F’ Dividend Safety Score. Over the past 11 years, 64.4% of stocks with an F rating cut their dividend. Inflation is eating into the company’s cash flows, and a challenging macroeconomic environment is pushing VFC to focus on growing margins and profitability through cost savings and strong investments. During the Q3 Earnings Call, Interim President & CEO Benno Dorer said ,

“We're making the tough, but what we believe to be a principled and financially responsible decision to cut our dividend by about 40%...It is prudent to right-size the dividend to accelerate the path back to our target dividend payout and debt-to-EBITDA ratios and to rebuild the dividend from there based on solid expected cash flows and a return to sustained earnings growth beginning with fiscal year 2024. Returning cash to shareholders through a strong dividend remains a key capital allocation priority. In a continued difficult environment, we are committed to return to a more profitable and consistent growth next fiscal year.”

Additional factors contributing to VFC’s dividend cut include inconsistent earnings results by its largest brand, Vans. In an unfavorable environment where consumer spending has slowed, VFC’s companies are struggling with excess inventories that have prompted product discounts, limiting sales growth. In addition to more customers shopping online, retail stores are seeing fewer in-store customers.

Although VFC’s Q3 earnings were strong, with an EPS of $1.12 that beat by $0.13 and revenue of $3.53B that beat by $47.20M, its growth and profitability grades are unattractive. VFC’s total debt to the end of December 2022 was approximately $6.4B, more than $1B from the previous year and nearly the amount needed to fund a $900M Timberland tax case. In addition to the surprise retirement of CEO Steve Rendle, who interim CEO Benno Dorer will replace, shareholders have a lot to consider, especially as revenues for the second half of 2023 are anticipated by the company to be modestly lower than initially expected.

Although the company trades at a discount with a forward P/E ratio of 11.61x, nearly a 20% difference to the sector, and a trailing dividend yield 272% higher than sector peers, its 88.85% cash flow payout ratio is unappealing. Additionally, VFC is trading near a 52-week low of $23.71/share, a share price falling nearly 60% over the last year. Considering reviewing dividend safety metrics as the company restrategizes amid its difficult period and new CEO at the helm. It is important to consider our scorecard as a tool to avoid companies whose dividends may be at risk of being cut.

2. Kingstone Companies, Inc. ( KINS )

• Market Capitalization: $14.21M

• Quant Sector Ranking (as of 2/26): 598 out of 666

• Quant Rating: Sell

• Dividend Safety Grade When Cut: D-

Kingstone Companies Inc., through its subsidiaries, writes property and casualty insurance for individuals and businesses in New York. Citing decreases in premiums and the challenging macro environment, KINS suspended its dividend on November 14, 2022, when its dividend safety grade was D-, in hopes that the cash savings of $1.7M would allow it to preserve capital. Kingstone may need capital to refinance debt which may come at a higher borrowing cost in the current rising-rate environment. Kingstone COO Meryl Golden states,

"In the midst of a challenging macro environment, we remained focused on operating with financial discipline, reducing expenses across the business by 2.4 points in the quarter and almost 4 points on a year-to-date basis. We are pleased that our cost-cutting measures are taking hold and are actively working to drive further expense reduction, including through the retirement of our legacy systems."

As showcased in the below Quant Ratings & Factor Grades, the company has been on a downtrend for some time. With poor profitability, momentum, and downward analyst revisions, it’s no surprise that the company’s dividend was at risk with so many headwinds in play.

Kingstone Companies, Inc. Quant Ratings & Factor Grades

Despite the stock possessing an A+ valuation grade, highlighted by forward EV/Sales of 0.26x compared to the sector median of 1.89x; forward Price/Sales of 0.12x versus the sector 2.53, its volatile 52-week share price ranges from as little as $0.69/share up to $5.44/share. Decelerating momentum and negative EPS revisions showcase KINS as possessing characteristics historically associated with poor future stock performance. In addition to its quant-sell rating, the stock is -75% over the last year, trading at less than $1.50/share. Despite a challenging macroeconomic environment, insurance companies are considered resilient in the face of potential recession and high inflation. Not only did Kingstone deliver an EPS miss of $0.33 for Q3 , but in the fourth quarter, its subsidiary Kingstone Insurance Company also estimated a net pre-tax catastrophe loss of $3.66M, or 12 points of net earned premium. These figures highlight another aspect of why Kingstone has suspended its dividend, whose dividend safety offered multiple warnings leading up to the time of suspension. Heed the warnings.

3. American Eagle Outfitters, Inc. ( AEO )

• Market Capitalization: $2.74B

• Quant Sector Ranking (as of 2/26): 36 out of 539

• Quant Rating: Buy

• Dividend Safety Grade When Suspended: F

Specialty retailer American Eagle Outfitters, Inc., offers clothing and accessories and is my only buy-rated stock in this bunch. Notably, the Buy rating came well after the dividend was terminated. Management needed to be putting capital back into the company, and they took the painful step of suspending the dividend. Despite its one-year price performance of -30% amid the economic slowdown, AEO showcased strong Q3 earnings, with an EPS of $0.42 that beat by $0.20 and revenue of $1.24B that beat by $32.21M. While the apparel industry has experienced many headwinds post-pandemic and continues to resolve the challenges, AEO has a strong management team and has taken the appropriate steps to manage the balance sheet.

Trading at a relative discount highlighted by forward EV/Sales and forward Price/Book of more than a 20% difference to the sector, AEO has an overall C+ valuation grade. However, with recession fears mounting, like VFC’s headwinds, excess inventory, steep markdowns, and less foot traffic into physical stores prompted American Eagle Outfitters to pause its dividend on November 7, 2022. At the time, Seeking Alpha’s Dividend Safety Grade was an ‘F,’ a telltale sign that investors should be careful if relying on its dividend for income.

American Eagle Outfitters Dividend History

The suspension came after AEO reported Q2 earnings. With a Q2 gross profit decline of 26% and more than 11% margin contraction from 2021, CEO Jay Schottenstein remarked ,

“This is an unprecedented time in retail. As we cycle exceptional demand from last year, a tougher macro environment is impacting consumer spending behavior…In a shifting macro environment, we are focused on controlling the controllables. Given ongoing external uncertainties, we have taken additional actions to improve financial performance. We have made more expansive expense reductions and are pulling back further on capital expenditures. As an additional cautionary move, we have paused our quarterly cash dividend to strengthen our cash position.”

During the same earnings call, shares of the stock fell 13.29%. However, the company is slowly recovering. As showcased in the Seeking Alpha Factor grades below, which rate investment characteristics on a sector-relative basis, AEO is fundamentally sound compared to the other picks throughout this article.

American Eagle Outfitters Factor Grades

American Eagle Outfitters Factor Grades (SA Premium)

On the back of strong Q3 figures and A-rated Earnings Revisions, eight analysts revised estimates up compared to one downward revision in the last 90 days. Although AEO’s gross margins remain depressed and the industry continues to face headwinds, if seeking a dividend-paying stock, it's crucial to heed the warnings and consider the bigger picture delivered by the quant ratings. Where AEO is a solid overall company with strong fundamentals, not all dividend stocks are created equal. Just because a company pays a dividend does not mean it is safe.

4. Sibanye Stillwater Limited ( SBSW )

• Market Capitalization: $5.87B

• Quant Sector Ranking (as of 2/26): 166 out of 278

• Dividend Yield ((TTM)): 9.71%

• Quant Rating: Hold

• Dividend Safety Grade When Cut: F

Precious metals and mineral company Sibanye Stillwater Limited is headquartered in South Africa with operations around the globe that benefitted from the spikes in commodities and the war in Ukraine. Despite its tremendous dividend yield of 9.71%, it cuts its dividend on August 25, 2022. Its remaining dividend categories are poor, as showcased below, highlighting a company whose dividend was cut in August of 2022, when Seeking Alpha had its dividend safety grade rated an F. Currently, SBSW’s Dividend Safety is a D-, as the company attempts to recover from losses and headwinds around the globe.

Sibanye Stillwater Limited Dividend Scorecard

Sibanye Stillwater Limited Dividend Scorecard (SA Premium)

As price swings for materials and commodities have whipsawed, SBSW has experienced geopolitical constraints and a sharp fall in profits after a three-month strike in its mines abroad and floods that impacted U.S. operations. Not only has the company’s one-year dividend growth rate dropped to -46.98%, but the underlying dividend consistency grades are also dismal, showcased below.

The macro-environment can significantly affect a company's ability to pay a dividend. As with some other companies, SBSW is extremely discounted, -51% over the last year boasting tremendous underlying valuation metrics.

While you may get this stock at a discount, remember there could be a higher price to pay, as Sibanye’s growth grade is an ‘F,’ and Earnings Revisions are a D+. The company has decelerated momentum, all as a result of global conflicts, almost as unattractive as Hanesbrands.

5. Hanesbrands Inc. ( HBI )

• Market Capitalization: $1.92B

• Quant Sector Ranking (as of 2/26): 491 out of 539

• Dividend Yield ((FWD)): 10.89%

• Quant Rating: Sell

• Dividend Safety Grade When Suspended: F

Hanesbrands Inc., popularized by basketball legend Michael Jordan, is trading at decade lows, amid a tough economic climate that has been impacted by supply chain constraints, inflation, and an uncertain outlook. As showcased below, the stock recently eliminated its dividend following poor Q4 earnings. The below banner flashed this warning to alert investors of the potential cut/elimination well in advance.

I recently wrote about Hanesbrands because of its poor fundamentals. As showcased in the below dividend scorecard, despite a tremendous 10.89% dividend yield, the dividend yield is insufficient to salvage a dividend after Q4 EPS of $0.07 missed by $0.01, dwindling growth, poor profitability, and ten downward analyst ratings. With its dividend yield as the only attractive dividend grade, the company’s outlook appears gloomy, having eliminated a dividend that was paid for nearly ten years.

Underlying dividend metrics showcase a Total Debt/Equity ratio of 580% compared to the sector's 91.62% and poor Cash from Operations of -29.92M that make up a portion of the ‘F’ Dividend Safety Grade. Needless to say, Hanes eliminated its quarterly cash dividend to focus on its capital allocation strategy. Despite Hanes’ only attractive factor grade being its valuation, this metric is not enough for many investors to consider this stock, or the others mentioned, for a portfolio.

The stocks throughout this article come with warnings because they’ve either had their dividends cut or possess characteristics that historically are associated with poor future stock performance. Seeking Alpha’s dividend grades is a great tool to help avoid stocks with potential dividend cuts and should be considered when creating your portfolio.

Are Your Dividends Safe?

In an inflationary environment, many investors look for dividend stocks to help offset portfolio losses while offering a steady income stream. The current economic outlook is uncertain. Slowing economies may slow a company’s ability to grow and remain profitable to pay dividends. With rising inflation and a hawkish Federal Reserve that has made it clear they will continue rate hikes, evaluating your stocks and assessing the dividend safety grade is imperative.

The five securities, VFC, KINS, AEO, SBSW, and HBI, had at-risk dividends, pinpointed by our Dividend Safety Grades. Although some of these picks may not have eliminated their dividends, the metrics may continue highlighting that future dividends could be at risk, and the stocks may not perform well overall.

Among many poor dividend metrics, stocks with weaker payout ratios, weak dividend coverage ratios, poor interest coverage ratios, and weak cash per share figures offer red flags that can help you avoid dividend cuts. In addition to these flags, our tools often offer an alert or warning banner. While many dividend-paying stocks stand to benefit in the current environment, they should possess strong dividend safety grades and robust fundamentals. Check out the Dividend Grades on your stocks to determine if the dividend income is strong, safe, and can stand to increase over time.

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