When the 10-year Treasury yield rose from the dead beginning in early May, one-trick pony stocks that were delivering high dividend yields without a compelling dividend growth or stock valuation story to complement the payout, got beat up. The Telecom and Utility stocks in the S&P 500, including the likes of AT&T (NYSE:T), Verizon (VZ), Duke Energy (DUK) and Southern (SO) have badly lagged since the spring rate uprising:
Sam Stovall, chief equity strategist S&P Capital IQ recently pointed out that another strike against those two sectors in a rising rate environment is that they are home to some pretty high debt-to-capital ratios. The telecom sector is at 57%, and Utilities at 50.5%, compared to the 38% average for the entire S&P 500 index. The consumer defensive sector wasn’t far behind Utilities at 49.7; it too has been dragging behind the market average.
The lowest debt-to-capital sector in the S&P 500 is info tech, at 27.5%.
If we’ve seen the end of low rates, companies with heavy debt loads are going to face rising servicing costs going forward as they roll over debt (to say nothing of issuing new debt.) Stovall sifted through S&P Capital IQ’s list of the 103 stocks with a Sell rating and red-flagged 11 companies with debt-to-capital ratios above 40% and dividend yields of at least 2.5% -- another above average payment commitment for a firm.
His watch-out list of indebted companies: Bemis (BMS), Brandywine Realty Trust (BDN), Cliffs Natural Resources (CLF), Cypress Semiconductor (CY), R.R. Donnelley (RRD), EastGroup Properties (EGP), GlaxoSmithKline (GSK), Knoll (KNL), Mack-Cali Realty (CLI), Safeway (SWY) and Steel Dynamics (STLD).
At YCharts you can drill down into a series of debt metrics including Debt-to-Equity, Debt-to-Assets, Net Financial Debt and Financial Leverage. (If you want to scope out Debt-to-Capital, call up a company’s long-term debt level and its Shareholder Equity. The calc: Debt/Shareholder Equity + Debt.)
A YCharts Stock Screener of S&P 500 companies (excluding financials) sorted by net financial debt and including financial leverage as a secondary metric indeed sends out its own warning signals.
The fact that Pitney Bowes (PBI) has the highest financial leverage of non-banks in the S&P 500 would have been a pretty good signal the dividend probably wasn’t safe. (Pitney Bowes cut its dividend in half this past spring.)
General Electric (GE) tops the list, but we’ll boot it out of hand given its sizable financial service arm. Verizon and AT&T are high on the list. While both sport very high dividend yields, AT&T’s 0.91 financial leverage ratio is well below the 3.0 for Verizon.
That’s not to say you have to take on highly levered companies to get an above average yield. Johnson & Johnson (JNJ) and its 3% dividend yield comes with a financial leverage ratio of 0.21. Chevron (CVX) has a current dividend yield of 3.3% and a financial leverage ratio below 0.15. Apple has a 2.5% yield and it too carries a financial leverage ratio below 0.15.
Granted, debt loads aren’t a stand alone metric for evaluating a company, but as we segue into the new new normal in which interest rates are no longer repressed, focusing some of your financial research on debt metrics becomes more pressing. As Stovall points out, “One can tread water more effectively when not tied to an anchor.” Especially an anchor that may soon be ever more weighted.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.