In the current financial landscape, there are numerous overextended stocks struggling due to unsustainable dividend payments. A prime example of this is the globally recognized pharmaceutical company, Bayer (OTCMKTS:BAYRY). On February 20, Bayer announced a drastic 95% dividend cut, planning to pay the legal minimum of 0.11 euros (12 cents USD) per share for 2023 as part of a three-year plan to reduce its debt.
In 2022, Bayer paid out 2.40 euros ($2.60 USD), 0.48 euros (52 cents USD) more than what analysts had predicted. Despite this, shares have remained relatively stable, suggesting the cut was already factored into the stock price. However, BAYRY has seen a 16% decrease year-to-date (YTD) and a 50% drop over the past 12 months.
Bayer’s debt issue can be traced back to its $63 billion acquisition of Monsanto in 2018, which has since become a legal nightmare. But Bayer is not alone in its need to cut dividends to pay down debt. The Altman Z-Score, which indicates a company’s likelihood of entering bankruptcy protection within the next 24 months, shows that there are 47 S&P 500 companies that are in a similar predicament. Here are the top three overextended stocks that urgently need to cut their dividends to stay afloat.
Fidelity National Information Services (NYSE:FIS), an American multinational company in the financial technology (fintech) sector, has an Altman Z-Score of -.12, indicating a high probability of bankruptcy proceedings in the next 24 months. The company’s Q4 2023 results fell short of expectations, with revenue of $2.52 billion and earnings per share (EPS) of 95 cents. The company’s Q1 2024 outlook was also disappointing, with EPS forecasted between 94 cents and 97 cents, well below the $1.01 analysts were expecting.
Despite this, FIS’s total debt at the end of December was $19.08 billion, $1 billion less than at the end of 2022. Its interest expense in 2023 was $621 million, more than double that of 2022. Its dividends in 2023 were $1.23 billion, up slightly from $1.12 billion in 2022. While this was about half its 2023 cash flow of $4.34 billion, it could have been used to pay down some of its debt.
Kinder Morgan (NYSE:KMI), one of the largest energy infrastructure companies in North America, has an Altman Z-Score of 0.74, indicating a high chance of bankruptcy proceedings in the next 24 months. Despite owning over 82,000 miles of oil and gas pipelines, the company has been a disappointment for shareholders. If you invested $1,000 in KMI stock at the beginning of 2016, your stock would still be worth $1,000 today.
The company’s 2023 results showed a distributable cash flow (DCF) of $4.72 billion, down from $4.97 billion a year earlier. In 2023, it paid out $2.53 billion in dividends, approximately 61% of its free cash flow (FCF) for the year. Its interest expense was $1.8 billion, up from $1.52 billion. It finished 2023 with a net debt of $31.84 billion, 3% higher than a year earlier. With net debt a high 84% of its market capitalization, it could pay down more than a billion dollars annually over the next five years by cutting its dividend in half.
Viatris (NASDAQ:VTRS), another global pharmaceutical company, has an Altman Z-Score of 1.13, the highest of the three stocks in this article, but still low enough to suggest a high chance of bankruptcy proceedings in the next 24 months. The company is the result of a merger between Pfizer’s (NYSE:PFE) Upjohn business and Mylan in November 2020.
Viatris paid down $750 million in debt through the nine months ending Sept. 30, 2023. It finished the third quarter with $17.07 billion in net debt, more than its current market cap of $16.12 billion. In 2023, it paid out $431.6 million in dividends, down from $436.1 million a year earlier. If the company were to cut its dividend in half, it would have $1.81 billion in FCF to pay down debt. While this may not seem like much, every little bit helps in the long run.
As of the date of publication, I do not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are my own and are subject to the publishing guidelines of the website.
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