What Is A Dividend Disaster?

| November 9, 2015 | 0 Comments

bearish chartI never thought my friend Large Lou Sapino would be a credible source of good dividend stocks investing wisdom.

We get together a few times a year when he drags me into Danny’s on Orange Avenue in Coronado, California.  I’ll nurse a beer and he’ll be drinking vodka.

Actually, he’s lecturing me on vodka.  It’s his passion.

Lou isn’t much of a drinker.  He’s more of an analyst, and an historian.

He told me the first Russian vodka was inspired by visitors from Genoa.  He insists that despite America’s current infatuation with France’s Gray Goose, only Russian vodka really matters.

So the last time we got together, Lou asked me about Russian stocks.  He had just come back from a trip to Moscow and wanted to know if he should buy any Russian dividend stocks.

Here’s more or less what I told Lou…

The Highest Dividend Yield Stocks To Avoid Come From Russia

I told Lou I could see why he was tempted, especially with a stock like Mobil’nye Telesystemy $MBT.

It pays a dividend that stretches from St. Petersburg to Siberia.  The last I checked, it was just shy of 11%.

And Mobil’nye Telesystemy isn’t a fly by night outfit, at least not by Russian standards.  It’s the country’s largest cell phone company, with 100 million mobile subscribers.

By comparison, Verizon $VZ, the largest U.S. carrier, has 102 million subscribers.

But the Mobil’nye Telesystemy stock is a heartbreaker.  Take a look at what’s been happening the past few years…

Mobil'nye Telesystemy Dividend Stock Chart $MBT

Somehow, the stock manages to get recommendations from people who should know better.  On August 19th, analysts at CitiGroup announced they were smitten with the company, and upgraded it to a “Buy”.

(See the spike and then the collapse after the CitiGroup upgrade?)

Lazard Asset Management, JP Morgan Chase, and Vanguard each own millions of shares.

So why am I so sour on a stock that some pretty smart people want to own?

Why am I down on one of the highest dividend stocks?

High yield-stocks are home wreckers.

At $MBT, the balance sheet is a mess.  The numbers just don’t work.

Even if you factor out all the chicanery, mischief, and shenanigans in the Russian financial markets…

Even if you believe in the data the company reports, you’re looking at…

The Molotov Cocktail Of Dividend Stocks

Revenue in 2014 went up in flames… $6.8 billion compared to $12.1 billion in 2013.  Net income took an even uglier turn for the worse, skidding from $2.4 billion to just $8.6 million.

When your revenues aren’t growing, you can’t grow the dividend.  The math doesn’t work any other way.  Not unless you rob Igor to pay Ivan.

The company is sitting on $4.16 billion in long-term debt.  And as for long-term prospects, I can’t find a single reason why we should believe business is about to turnaround.

It’s not too hard to see Mobile TeleSystems following in the footsteps of another Russian stock nightmare.

(Another mobile telecom company.)

Three years ago, VimpelCom $VIP paid a dividend of 18.87%.  Today, the yield is 1.38%.

What went sideways with VimpelCom?  In 2014, it admitted that sales wouldn’t hit its optimistic early projections.  Then big investors bailed.

The high-flier peaked in October 2013 at $14.31.  Earlier this year, it traded at $3.60.  Shareholders watched their fat dividend virtually vanish as the stock price melted down.

Russia doesn’t have a monopoly on stories like this.  Dividend stocks with big promises that turn into big problems are traded on exchanges from Mexico City to Mumbai.

And definitely in New York.

But it seems you run into your unfair share of these high dividend stocks in Russia.

One of today’s dividend darlings from Russia is CTC Media $CTCM, which pays a yield of 42%.  The dividend payout ratio is 304%.

Talk about living beyond your means… this ratio means CTC pays three times as much to pay the dividend as it earns in revenue.

For every dollar the company earns, it needs to scrounge up another two just to pay the dividend.

How long do you think this party lasts?

It’s just a matter of time.  Take a look at the change of fortune for CTC…

$CTCM #DividendStocks chart

When CTC’s stock price started falling in 2014, it didn’t cut the dividend.

In fairness to the company, a falling stock price isn’t a reason to cut the dividend.

But falling income is, and the income at CTC Media has been skidding.

When you’re sizing up a dividend stock, whether it’s from Moscow or Memphis, get beyond the high yield.

Look deeper.  See what’s happening with net income, because that’s what should pay the dividends.

Ideally, you want to find a company where net income is growing and where the profit margins are growing as well.

These Russian companies that depend on homegrown revenue just don’t deliver.

And don’t forget what the strength of the U.S. Dollar relative to Russia’s Ruble has done.

It’s made Russian companies cheaper to buy.  At first glance, this looks just as appealing as a high yield.

Russian companies that don’t depend on homegrown revenue can be a different story.

There’s recently been an upside when the company exports what it sells.  When you pay for labor and raw materials in rubles, then get paid for what you sell in dollars, you’re sitting in the currency catbird seat.

But no matter where it’s headquartered or what it does, buying a company in trouble – at any price – usually doesn’t work out too well.

And stocks with the highest dividends just lure you in with a sweet-sounding promise.

You’re better off investing in a bottle of Russian Standard Vodka.

Cordially,

Paul Duke

Note:  Paul Duke writes and edits DividendStocksResearch.com.  Sign up for our free dividend reports and dividend newsletter at https://www.dividendstocksresearch.com/free-sign-up.  We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.

 

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Category: Dividend Bust

About the Author ()

Paul “Dividend” Duke is a veteran investor with a longstanding interest in dividend stocks. He brings a balance of both technical and fundamental analysis to his work, and focuses on opportunities that provide safety, capital appreciation, and income.

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