Some stocks are out on a limb, risking a fall with dividends that are too generous. The venerable pharmaceutical giant Bayer (OTCMKTS:BAYRY) recently sent out shockwaves with a 95% slash in dividends on Feb. 20 as part of a strategic initiative to shore up its debt. The new payout of 0.11 euros (12 cents USD) per share for 2023 is a stark contrast from the previous year’s 2.40 euros ($2.60 USD), which sailed over analyst predictions by 52 cents. Despite the plunge, the market’s muted response points to anticipatory pricing in the stock. Nevertheless, the numbers don’t lie – BAYRY is adrift, down over 16% year-to-date and a whopping 50% in the past 12 months.
The acquisition of Monsanto in 2018, which set Bayer back $63 billion, has proven to be an albatross around its neck. The legal entanglements surrounding this buyout have forced Bayer’s hand to make heart-wrenching decisions.
The tale of woe at Bayer finds kindred spirits across the financial world. The Altman Z-Score, a dire harbinger of imminent bankruptcy within two years, ominously flags 47 dividend-paying S&P 500 companies as teetering on the edge. Among these, three forlorn stocks stand out as testaments to the necessity of prudence in dividend policies.
Fidelity National Information Services Faces A Financial Crossroads
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Fidelity National Information Services (NYSE:FIS), a financial technology maven based in the U.S., finds itself at a precarious financial juncture with an Altman Z-Score that barely registers positive at -.12. The company’s Q4 2023 results, though not entirely dismal, failed to meet bullish expectations by a whisker. Revenue fell short by $10 million, while earnings per share (EPS) came in at 94 cents, one cent below forecasts.
As analysts peered into their crystal balls for Q1 2024, the outlook appeared dim. Projected EPS of 94 to 97 cents fell well below the $1.01 consensus, with revenue estimates hovering $20 million below projections. While a silver lining brightens the far horizon of 2024, with upbeat forecasts cheering shareholders, the present is mired in financial quicksand.
The financial ship of FIS, sailing in seas of heavy debt, saw its interest expenses double to $621 million in 2023, shadowing its efforts to batten down the hatches. Despite a buoyant cash flow of 4.34 billion in 2023, dividends of 1.23 billion barely made a dent in the mounting debt. As FIS eagerly plans to pocket $12 billion from selling off 55% of Worldpay, shareholders see a gleam of hope amidst the encroaching darkness. But with $10 billion in debt slated to remain even after the sale, prudent debt management beckons louder than the siren’s song of shareholder rewards.
Kinder Morgan Treads Weary Path With Potential Pitfall
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Kinder Morgan (NYSE:KMI) stands at the precipice, with an Altman Z-Score of 0.74 hinting at potential bankruptcy looming within the next two years. As a stalwart in North America’s energy infrastructure realm, its over 82,000 miles of oil and gas pipelines bear silent testament to its struggles in keeping shareholders happy.
Invest $1,000 in KMI stock at the start of 2016, and today its value stands static at $1,000, dividends aside. A lackluster annualized total return of -1.5% over the last decade paints a somber picture of dashed hopes and dimming prospects.
While announcing a modest 2% uptick in quarterly dividends to 28.25 cents with Q4 2023 results, the stagnant trajectory raises ominous eyebrows. The annual payout at $1.13 might offer a seductive 6.6% yield, yet the undercurrent of dividend stagnation often foreshadows darker days ahead.
KMI’s 2023 balance sheet flashes a discouraging sign with distributable cash flow (DCF) falling to $4.72 billion from $4.97 billion the year prior, citing higher interest rates and sustained capital outlays as culprits. At $2.10 per share, DCF numbers slumped 4% from 2022, ringing alarm bells of sustainability.
The company’s dividend payments of $2.53 billion in 2023 paint a bleak picture of financial stability, consolidating the pressing need for a strategic overhaul in dividend policy to sail the choppy waters of the energy market.
The Financial Fortunes of Viatris (VTRS)
As Viatris (NASDAQ:VTRS) navigates the tumultuous waters of the pharmaceutical industry, investors keep a keen eye on its financial health. With an Altman Z-Score of 1.13, the company stands as the strongest link among the trio analyzed here. However, this Z-Score, while an improvement, still points to a looming threat of bankruptcy within the next two years. Viatris, a result of Pfizer’s (NYSE:PFE) Upjohn unit merging with Mylan in late 2020, presents a case study of mergers’ aftermaths in the pharmaceutical sector.
Viatris’s Debt Dynamics
The stock witnessed a slump post-merger, hitting a low of $8.77 in October 2023, but has since shown resilience, clawing back to the low double digits. Despite this recovery, Viatris has been diligently tackling its debt obligations, repaying $750 million in the first nine months of 2023. By the end of the third quarter, its net debt stood at $17.07 billion, eclipsing its current market cap of $16.12 billion.
Dividends and Debt Repayment
Viatris has maintained a quarterly dividend of 12 cents per share since a minor uptick in February 2022. This brings the annual dividend rate to 48 cents per share, yielding a respectable 3.6%. The company shelled out $431.6 million in dividend payouts for 2023, a slight dip from the previous year, aided by the $750 million debt reduction. Concurrently, interest payments for 2023 remained steady at $432.2 million.
Free Cash Flow Strategies
In the trailing 12 months leading up to September 30, 2023, Viatris recorded a free cash flow (FCF) of $2.02 billion. To further trim the debt load, a strategic move might involve halving the dividend, freeing up an additional $216 million when compared to 2023. This would provide Viatris with $1.81 billion in FCF to chip away at its debt burden. Every dollar diverted towards this cause counts, aiding in the company’s efforts to fortify its financial position.
Overall, the journey for Viatris remains one of balance, juggling dividend commitments against debt obligations while striving to fortify its financial foundation. The pharmaceutical giant continues to weather the storms of industry shifts and financial challenges, all under the watchful eyes of discerning investors.
On the date of publication, Will Ashworth 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.
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