Dividend investing remains a cornerstone of wealth generation in the world of finance. It’s a strategy that has proven to be a significant source of returns for many investors. However, the sustainability of a company’s dividend yields is crucial for the success of this strategy. Here, we examine the unfolding scenario of three companies that could potentially face dividend cuts, akin to the recent announcement from Southern Copper.
Challenges at Hasbro (HAS)
Toy manufacturer Hasbro (NASDAQ:HAS) continues to navigate a challenging period, marked by a 23% sales decline in the crucial fourth quarter, inclusive of the holiday season. Alongside this, operational losses of $1.2 billion have been recorded. In response, the company executed a significant cost reduction plan, including a substantial workforce reduction and aggressive inventory level maneuvers. While management maintains its commitment to sustaining the current dividend payout, the financials suggest a different story. With debt still mounting and cash reserves insufficient, doubts linger over the company’s ability to maintain the current rate of dividend distribution.
Furthermore, with its competitor Mattel (NASDAQ:MAT) only achieving a turnaround after slashing its dividend, it raises questions about Hasbro’s chosen path. As the company grapples with these challenges, the prudence of relying on its dividend payout becomes increasingly uncertain for investors.
Real Estate Challenges at Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) has experienced growth in its stock value, up 14% since November, attesting to its resilience. However, as a real estate investment trust (REIT), the company encounters the challenge of distributing most of its profits to shareholders. Despite consistent dividend growth since its public listing, the company has signaled a diminished growth rate. The recent modest increase in dividends is overshadowed by inflationary pressures, rendering the dividend yield less lucrative for investors.
As the cannabis industry grapples with oversupply and regulatory uncertainties, the sustainability of the current dividend yield is in question for Innovative Industrial Properties. While it remains an attractive business proposition, investors are cautioned against banking solely on its dividends.
Struggles at Best Buy (BBY)
Challenges Ahead for Best Buy
Troubling Times for Best Buy
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Consumer electronics retailer Best Buy (NYSE:BBY) is grappling with a barrage of challenges. The company’s dividend, already a weighty burden, is proving increasingly difficult to sustain at current levels and may require cuts to ease cash flow strains.
Financial Struggles and Revenue Decline
Best Buy is confronting declining sales and profits. The turmoil in the housing market has placed significant pressure on essential segment sales, particularly appliances, which contribute 14% to the retailer’s revenue. Appliance revenue witnessed a sharp decline of 15% in the third quarter.
Despite the possibility of surpassing Wall Street estimates, the company is likely to report declining full-year earnings later this month. Over the past five years, Best Buy has consistently raised its dividend, increasing it by an average of 15% annually. This trend has continued over the last decade, with an 18% surge. With free cash flow dwindling rapidly, maintaining such substantial growth rates is increasingly arduous.
Impact of Store Closures
Compounding its challenges, Best Buy has shuttered 24 stores in the first nine months of 2023 and a staggering 100 over the last five years. Furthermore, the company anticipates closing 15 to 20 stores annually in the foreseeable future. The reduction in stores inevitably leads to lower sales, hindering the ability to sustain a dividend yielding 5% per year. Although the stock has rebounded 20% from recent lows, this rally does not justify an investment solely for its dividend.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.