Thursday, March 12, 2009
(Cont'd from above)...

Jim:      Lately, companies have been slashing dividends like crazy… and you don’t want to own a stock when Jason strikes, okay… now the most emotionally charged page of the paper these days isn’t the business section… it is the whole page of dividend declarations… who knows what will happen anymore… think of it as the corporate obituary page… and you should follow it… so in tonight’s Sell Block… I am going to help you avoid some companies that I believe will have to slice their dividends… save you some serious trouble… whenever you look at a stock with a big dividend, you always have to answer the question… well, another cultural touchstone that Lawrence Olivier posed so poignantly in the Marathon Man… is it safe… if the answer is no, you better break out the clove oil because you are in store for a lot of pain… and you could sell and get out before you walk into the dreaded house of pain… I have to give a big shout out, by the way, to my colleague at TheStreet.com, where I am chairman… Dave Pelletier, he runs the fabulous Dividend Stock Advisor Newsletter that you can find on TheStreet.com… he has helped me to determine which companies may have to cut their dividend.

So, take Alcoa, Inc. (AA)… the world’s largest producer of aluminum… a stock that once traded at around $44 and now trades at around $6... if you want to know what a company looks like shortly before it cuts its dividend… I think Alcoa is your template… Alcoa has been paying out a .17 cent quarterly dividend.. that works out to .68 cents annually… which gives this under $10 stock a 11.4% yield… oh come on, looks like Alcoa is one of those accidentally high-yielders that they talk endlessly… but it is not one where I expect the yield to stay at those lofty heights… in fact, I expect it to come crashing down hard… sometimes high yields are a sign that a company is in trouble… and its share prices come crashing down for a very good reason… Alcoa made its last payout in February, so stay tuned cause we should expect the next announcement of its dividend… the one where it may declare or not within the week.

So why don’t I trust Alcoa’s dividend… alright, after 70% decline in earnings in 2008 Alcoa expects to lose more than .70 cents a share in 2009... so remember our rule of thumbs for dividends, that we like to see a companies earnings per share twice the size of the dividend payout… in Alcoa, we have a company that is losing more money than it expects to pay in dividends… and I find that troubling… business is horrible at Alcoa… and its balance sheet, well, let’s just say if possible looks even worse… it is more frightening than Saw IV… which by the way was infinitely more frightening than Saw III… at the end of 2008 the company had $10.6b in debt, although none of it is coming due in the next year… compared to $762m in cash… uh, oh… it is true that Alcoa could get about $1b by winding down its joint venture, investment with Rio Tinto… but even that might not be enough to help them sustain the dividend… in the best case scenerio, where aluminum prices recover swiftly, they could use the money from the asset sale to fund its dividend… but then where would it be… for Alcoa to keep its dividend the same it will need to pay out $545m a year.. and I am skeptical that we will even have that kind of money to throw around… now, just so you know, it doesn’t necessarily mean that it is going to down when they cut the dividend… but this is what I am trying to alert you… now, if you want to know more there was a great research note from RBC Capital… suggesting that even if aluminum prices recover hard, Alcoa’s dividend could still be in trouble… and I do believe in a recovery in aluminum… RBC estimates that they will have to borrow another $1.5b to fund its spending plans for 2009... and under that scenerio I just don’t see how the company can justify keeping the dividend at these levels, or keeping the dividend at all if they have to borrow $1.5... this one definitely has me concerned.

Alcoa could cut back on its capital expenditures trying to keep its business afloat instead of the dividend… but that is reason enough to sell the stock isn’t it… we don’t want to own stocks of companies that are unprofitable and borrowing money to pay their shareholders big dividends… we don’t mind if they are unprofitable for the moment and paying it away for a term.. but not if they have to borrow for that dividend… that makes no sense… the way I see it is that Alcoa will be one of those companies that will borrow to pay the dividend or cut the dividend… no matter what I think, this name belongs in the sell block.

Are there any other companies that Pelletier tells me have suspicious looking dividends?…

I would be remiss if I didn’t mention BB & T Corp. (BBT)… a frequently called about stock on the Lightning Round… 

That is a regional bank that has been doing its best to hang in there… it is a very conservative bank… doesn’t matter right… it has a 11.4% yield… and even though I have become more sequent about the financials after the good news from Citigroup, from Wells Fargo, from JP Morgan, and now from Bank of America today, which we recommended on Tuesday… I worry about BB&T dividend…. why, BB&T kept its payout last Friday but it is really the only bank that has taken TARP money, $3.1b worth… and hasn’t yet, hasn’t yet cut the dividend… the next announcement is not expected till June… you have to remember that TARP money was taken on terms that were fairly unfavorable to the banks… and while BB&T is one of the best regional banks in the country… I just don’t know what it can do what every other bank that has taken TARP money has been unable to do… which is maintain the dividend.

Here is the bottom line…

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