Markets are swinging violently on speculation about Washington's response to the coronavirus pandemic. The Dow has plunged more than 35% from its all-time highs in February as the outbreak effectively shuts down the global economy.
Many look at this as a great time to buy stocks cheap, especially as dividend yields soar. It's important to note, however, that some blue-chip dividend stocks may not recover. Even if it looks like a "bargain," some stocks that were once attractive buy-and-holds are not what they were a few months ago.
Investors should be cautious about buying certain stocks simply because the company's dividend yields have ripped to new highs.
Remember, dividends rely on strong cash flow to return capital to investors. While consumers are pulling back, governments are bailing out customers, and production is shutting down. Large cuts to dividends or outright suspensions of payments are happening in waves.
Here are three-blue chip dividend stocks to avoid in the weeks ahead.
Blue Chip Dividend Stock to Avoid, No. 3: Carnival
Shares of Carnival Corp. (NYSE: CCL) have plunged as much as 80% since the start of the year due to the ongoing coronavirus spread. For the cruise industry, the coronavirus outbreak could be even worse than what is happening in the airline industry.
The recent Grand Princess quarantine has quickly sunk into the minds of travelers. A Ruby Princess ship with 2,700 passengers showed that 130 people contracted the disease. With ships recycling the same air through the cabins, they can quickly become breeding grounds for illnesses. And now, almost anyone considering a cruise in the future will weigh this health outbreak into their decisions.
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Carnival Corp. is one of the world's largest cruise operators. Shares are trading at $12, with a staggering dividend of 16.6%. But Wells Fargo's analyst covering this sector argued this week that the stock might fall as low as $6. Timothy Conder at WFC slashed his price target from $55 to $6 on expectations that the company will need to engage in a "dilutive" raise to survive. That would be a 50% downturn from today's price.
Even if that share dilution never happens, there is still a bearish case for the dividend. Carnival has a history of cutting its dividend due to hard economic times. It wouldn't surprise me to see the company flat-out suspend that dividend for the foreseeable future. The company faces a long, difficult road back to success, given the psychological barrier that many customers must overcome in the wake of this outbreak.
Blue-Chip Dividend Stock to Avoid, No. 2: L Brands Inc.
Earlier this year, L Brands Inc. (NYSE: LB) stock plunged due to ongoing concerns about its founder's relationship with Jeffrey Epstein. Some other L Brands companies include Victoria's Secret, Bath & Body Works, and formerly Express and Abercrombie & Fitch.
Shares of L Brands rallied back after the company reached an agreement with an activist fund to make two significant changes.
First, founder and CEO Les Wexner would depart his role from the company he founded. Second, the company would sell a 55% stake of its high-powered Victoria's Secret brand to private equity shop Sycamore Partners for $525 million.
However, the $1.1 billion valuation for Victoria's Secret was too low of a price tag for many shareholders. Investors argued that the valuation was well below market value based on a key multiple: trailing 12-month price-to-sales. A recent analysis by an analyst on the Trefis platform shows that fair value should have been about $1.8 billion.
The sale signals broader problems at L Brands, such as ballooning debt, declining mall traffic, new competition, and shifting consumer sentiment. The coronavirus outbreak is just another pressure point on a struggling retailer. Following this outbreak, e-commerce will likely continue to rise as the dominant medium for shoppers. This is bad news for the company's other remaining business: Bath & Body Works. Even though the firm has suspended operations at Victoria's Secret to focus on hand sanitizer and soap, don't expect business to return as usual.
Shares of L Brands are currently trading under $10 per share. The company recently withdrew its forecasts for the year. With companies like Nordstrom Inc. (NYSE: JWN) now suspending their dividend and buyback programs, look for weaker retailers to follow suit. The stock has a 13% dividend yield right now. Don't be surprised if that number falls to 0% in the weeks ahead.
But of all these dividend stocks, this next one could lose you the most money...
The Top Blue-Chip Dividend Stock to Avoid
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Investors have to prepare themselves for big cuts to dividends in the months ahead. In the global oil industry, producers of all sizes are struggling with crude prices falling under $25.
This week, major producers like Chevron Corp. (NYSE: CVX), Total SA (NYSE: TOT), and Royal Dutch Shell Plc. (NYSE: RDS) moved to cut costs and production to ensure they could protect their capital and remain cash-flow positive. There is broad speculation that European producers are better off in securing their dividend payments than U.S. majors because they typically have lower production costs.
That has made Royal Dutch Shell a favorite among investors with its dividend yield sitting at roughly 14%. But let's take the contrarian approach to this at the moment.
Right now, it's uncertain how long this market downturn will last. Energy producers are a fickle bunch, and crude has been very volatile in recent weeks. Investors are hoping that Saudi Arabia and Russia will reach a deal to cap production. However, demand around the globe has been crippled by coronavirus and weak economic growth.
Royal Dutch Shell has two negative marks right now. First, it hasn't increased its production for two years, and that trend is likely to continue due to the current economic outlook. Second, the firm trails all of its major peers in terms of proven reserves in oil and gas.
So, while its 14% dividend may appear attractive, investors would be better off looking at some of its other European rivals instead of simply jumping onto a specific yield simply because the number is so large.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.