Investors may want to be more selective when it comes to stocks with high dividend yields, according to Piper Sandler. The warning comes amid an earnings season that has been marked by solid results from megacap technology companies. Yet, Piper points out that small- and midcap reports have been "lackluster at best," seeing no trace of a broad-based recovery.
Not only that, the labor market has been cooling, with July's nonfarm payrolls report showing the unemployment rate rising to 4.3%. "In this backdrop of bifurcated earnings and a deteriorating labor market, it is especially important to consider the sustainability of dividend payments," the firm wrote in a Tuesday note to clients.
"Not all stocks with a high dividend yield are high quality." With this in mind, Piper looked through the S & P 500 dividend payers to see which stocks could be at risk of seeing a dividend cut. To gauge this, the firm used the following formula: cash flow minus preferred dividends minus capital expenditures divided by common dividends.
If that "ability-to-sustain ratio" is less than 1, Piper considers it "concerning." Here are a few names in the screen to watch out for: Walgreens Boots Alliance made the list of concerning names. The pharmaceutical chain has the highest dividend yield on the list at 9.
4%. However, its ability-to-sustain ratio is well below than the greater-than-one threshold. Shares have plunged more than 60% this year.
Walgreens also saw its worst day on record on June 27, when it fell more than 22% on the back of weaker-than-expected earnings for the fiscal third quarter and plans to close underperforming U.S. stores.
WBA YTD mountain Walgreens, year-to-date With that, Wall Street has remained largely neutral on the stock. Of the 20 analysts covering the name, 14 have a hold rating and only two have a buy rating, per LSEG. Pfizer is another dividend payer to watch out for.
The biopharmaceutical stock made the screen with a top-five dividend yield on the list at 5.9% and a ratio of 0.55.
The company made efforts to regain favor with the Street, launching a multiyear cost-cutting strategy in the wake of a swift demand drop for its Covid products. The company recently reported better-than-expected second-quarter results and upped its full-year revenue forecast. Oneok also made the cut of concerning stocks, having a dividend yield of 4.
7% and a ratio of 0.93. The stock has seen big gains this year, with shares rising more than 20%.
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