Shares with high-yielding dividends can sometimes be a double-edged sword. Companies that have to contend with drastic cash flow problems, delaying demand or debt loss can quickly lose investor confidence. Such a toxic mix of problems entails the risk of stock prices refueling, thereby driving up dividend yields.
Two iconic American brands – Ford Motor Company (NYSE 🙂 and AT&T Inc. (NYSE 🙂 – struggle with situations like this. In recent years, their stock prices have been on a slippery slope, while their dividend yields have risen. Both stocks offer a return of almost 7% – a very attractive return at a time when government bond yields have fallen, thereby improving their income in revenues
By examining the issues they face, we can better understand whether their high returns represent an opportunity or a threat that income investors should avoid.
Ford: Tough Balancing Act
After years of rising sales, & # 39; the world's second largest automaker, demand for its & & quot; 39 & s; cars is slowing down, led by China and Europe.
For the fiscal year that ended in December, Ford had fallen about 27% for interest and taxes. In addition to the cyclical factors, the car manufacturer is also under pressure from more structural changes taking place in the automotive industry, where consumer preferences are changing and a major disruption of electrical and autonomous car manufacturers – such as Tesla (NASDAQ 🙂 and Google & # 39; s (NASDAQ 🙂 Waymo – is just around the corner.
To meet these challenges, Ford announced a $ 11 billion company-wide restructuring plan last year, spread over five years, including major job losses, the elimination of slow-selling variants of certain models and the possible closure of entire factories in Europe. .
Ford Weekly Chart
But these steps have failed to convince investors who believe the company is going too slow to meet the challenges that require a more proactive approach. This distrust has led to Ford's shares losing more than 20% of their value in the past year, falling from $ 10.81 a year ago to $ 8.61 at the close of yesterday, and raising its dividend yield to 7 , 13%. It also raises doubts about the company's quarterly dividend of $ 0.15 per share – currently the most generous of the comparable cars in the automotive sector.
AT & T: Victim of debt-driven growth
Telecom companies are generally considered to be a safe long-term bet for income investors, given their reliable cash flows that continue to flow in as long as telephone bills are paid.
AT & T, the largest telecom operator in the United States, is a dividend stock that has delivered uninterrupted payout walks over the past 35 years. But despite this remarkable history, investors are becoming skeptical about the company's future prospects after the company acquired Time Warner & # 39; s assets for $ 85 billion last June.
AT & T entered this massive venture to transform itself into a modern media company that is better able to compete with disruptors, such as Netflix (NASDAQ :), due to its superior content. The acquisition was intended to accelerate growth in accelerating cable cutting at the cable department. More than 400,000 subscribers stopped AT & T's DirecTV satellite service in the fourth quarter of 2018, bringing the total loss for the past fiscal year to a whopping 1.24 million
But the market did not like the AT & T growth initiative, which was accompanied by many debts. After the Time Warner transaction, the telecom giant's debt increased from $ 126 billion at the end of 2017 to $ 171 billion at the end of 2018.
AT&T weekly ticket
His inventory has fallen by around 20% in the last 12 months, from $ 37.36 a year ago to $ 30.22 at the close of yesterday. With this, the annual dividend yield has risen to 6.81% over time and concerns have been raised about the quarterly dividend of $ 0.51 per share.
Which inventory is a safer bet?
It is difficult to see growth returning to these companies quickly. Both the automotive and telecom sectors are undergoing major changes, which continue to put pressure on their income, free cash flows and their share prices
That said, growth is not the reason to invest in these stocks. Investors in AT & T and Ford can take a long-term approach and buy these shares to earn regular income. With this aim in mind, AT&T shares offer better value with its long-standing track record of paying dividends and the reasonable payout ratio of 75.69 as a percentage of free cash flow.
Ford, on the other hand, is not as reliable as AT & T when it comes to the dividend. Ford last shortened the payment in July 2006 and then suspended it two months later amid collapsing sales. The company revived the dividend in 2012 after being the only Detroit car manufacturer to go through the global recession without resorting to government-backed bankruptcy.
AT & T & # 39; s restructuring could be a long and painful process, but its 6.81% return is a better bet than Ford's.
