Investors turn to dividend stocks in anticipation of an economic slowdown, but they need to watch out for those companies that may end up cutting their payouts, Wolfe Research warned. The problem is, as the economy slows, boards of directors may start taking a knife to dividends. “We expect more dividend cuts in the quarters ahead as lagged impacts of rate hikes impact the economy and consumers,” analyst Chris Senyek wrote in a late November report. The Federal Reserve started hiking rates in early 2022 to fight inflation. The market is anticipating rate cuts next year, although Fed Chair Jerome Powell recently said it was premature to talk about cuts and that more hikes could still happen. Senyek would avoid or short companies that have the potential to slash dividends. He looked for companies possibly at risk of a dividend cut based on their leverage — the level of debt to assets — and higher payout ratios, which track the level of dividends to earnings. Specifically, Senyek screened for stocks that had a yield greater than 3.5% and at least one of the following: net debt over expected 2024 profit, as measured by earnings before interest, taxes, depreciation, amortization and restructuring or rent costs (EBITDAR), greater than 3.5x; a payout ratio greater than 80%; or more than 80% dividends/free cash flow to equity coverage. Senyek is particularly concerned about consumer discretionary companies. Here are some of the names on his list. Hasbro , which has a dividend yield of 5.7%, is slightly under the 3.5x bar for high leverage but has a payout ratio of 100% and 160% dividend/free cash flow to equity coverage. The maker of Play-Doh modeling clay and Monopoly board games has faced weak toy sales and is laying off about 1,100 employees, according to a company memo obtained by CNBC on Monday. In October, Hasbro cut its guidance for the full year, projecting a 13% to 15% revenue decline, worse than its previous forecast of a 3% to 6% revenue drop. Shares are down almost 22% in 2023 after sliding another 2.5% Tuesday on news of the layoffs. Meanwhile, Tyson Foods has a whopping 161% payout ratio and negative free cash flow. Last month, the company reported a revenue miss for its fourth quarter. On the earnings call, chief financial officer John Tyson said startup costs in prepared foods and rising cattle costs will hurt the first and second quarter and generally push profitability back to the second half of fiscal 2024. “In addition, we’re monitoring potential impacts to the consumer of higher interest rates and inflation, which could create some volatility,” he said. Shares lost about 18% year to date. Several health-care stocks also made the list, including Pfizer . While the company isn’t highly leveraged, it does have an 89% payout ratio and 112% dividend/free cash flow to equity coverage, Wolfe found. Shares of Pfizer were recently hit when the company stopped developing the twice-daily version of its experimental weight loss pill after patients had trouble tolerating the drug during a study. On Tuesday, the company received regulatory approval to complete its acquisition of Seagen . The stock currently has a dividend yield of 5.7% and is down 44% so far this year. Lastly, United Parcel Service ‘s dividend is also at risk of potentially being cut, according to Wolfe. Its payout ratio is 72% while its dividend/free cash flow to equity coverage is 95%. In late October, UPS reported a bigger-than-expected decline in revenue and slashed its revenue guidance for the year. The stock has a 4.2% dividend yield and has lost more than 10% so far this year. — CNBC’s Michael Bloom contributed reporting.
