Dividend stocks can generate a lot of recurring income for your portfolio each year. But investors should always remember that these payouts are never guaranteed. A company facing financial problems may have to resort to cutting its dividend if it cannot find a better option.
The market is full of examples of companies lowering their payouts for a myriad of reasons (good and bad). Three companies that had to cut their dividend payments by more than 40% last year are now doing so Walgreens Boots Alliance (NASDAQ: WBA), Reliance on medical properties (NYSE: MPW)And Cracker Barrel Old Country Store (NASDAQ: CBRL).
Let’s take a look at why they did that and whether these three stocks could potentially be good contrarian investments.
1. Walgreens Boots Alliance
Pharmacy retailer Walgreens Boots Alliance has been struggling with profitability for years. The company typically generates modest single-digit profit percentages in most quarters, but it’s not unusual for the company to also end up in the red. In three of the past four quarters, Walgreens posted a net loss.
In January, the company announced it would cut its quarterly dividend payment from $0.48 per share to just $0.25 (a 48% cut). It was a seismic move for a company that had paid and increasing its dividend for decades. The move came not long after the company hired a new CEO, Tim Wentworth. One reason for the cut was to shore up the finances needed to continue plans to launch hundreds of clinics as part of a broad health care strategy.
Investors can still get a high yield of 6.3% from Walgreens stock, but without stronger financials, even the new dividend might not be sustainable in the long run. Walgreens is also actively trying to sell its Boots pharmacy chain in Britain to raise additional funds, but is not getting much interest from buyers.
Walgreens stock hasn’t been this cheap in more than a decade, so it could be an intriguing investment for contrarians. But given the uncertain path forward, this is a stock that investors will want to keep a tight leash on, as losses could continue to pile up for both the company and its shareholders.
2. Reliance on medical property
Medical Properties Trust has had problems with financially struggling tenants for several years. Steward Health, in particular, is a major concern for the healthcare-focused real estate investment trust (REIT). It needs its tenants to pay rent, and Steward and a few other health care companies are struggling to do just that.
Medical Properties Trust has even provided financial support to Steward over the years, but that has not solved the tenant’s problems; in May, Steward announced it had filed for bankruptcy protection and would sell its hospitals.
Well before that, in August 2023, the REIT announced a new quarterly dividend per share of $0.15, down from the $0.29 it previously paid (a 48% reduction). Given the uncertainty surrounding Steward Health’s future, there is still plenty of risk surrounding Medical Properties Trust and its dividend.
Like Walgreens, the healthcare stock hasn’t traded at current levels in more than a decade, so there could be significant upside for contrarian investors, but significant losses could also follow. Investors should buy the stock at their own risk, as the REIT likely has a bumpy road ahead.
3. Cracker Barrel old country store
Cracker Barrel operates 660 locations nationwide with a restaurant and gift shop. It offers customers multiple reasons to visit one of its stores, but lately that doesn’t seem to be enough. So the company is investing in its operations to increase profitability as traffic has not been particularly strong.
The company will revamp its menu and remodel its stores, and has hired an agency to help strengthen its brand. However, all of these require cash, and the company is going to free up this cash by cutting the dividend per share from $1.30 per quarter to just $0.25, a massive 81% payout reduction.
Profits have been meager for Cracker Barrel, with the company reporting a profit margin of just 2.9% in its last fiscal year (which ended in July), and a challenging economy is exacerbating the problems. Cracker Barrel is trading at ten times its forward earnings, and with its stock trading at levels not seen since 2011, Cracker Barrel looks cheap. But it certainly comes with a lot of risks.
If the restaurant chain’s efforts to revitalize its stores pay off, it could mark another turnaround with significant upside potential. However, due to its high risk, Cracker Barrel is a stock that will be especially suitable for contrarian investors who are willing to be patient. It could take a while for the company’s moves to bear fruit, assuming they do at all.
Should You Invest $1,000 in Walgreens Boots Alliance Now?
Consider the following before purchasing shares in Walgreens Boots Alliance:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Walgreens Boots Alliance wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $677,040!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 28, 2024
David Jagielski has no position in the stocks mentioned. The Motley Fool recommends Cracker Barrel Old Country Store. The Motley Fool has a disclosure policy.
These 3 Dividend Stocks Cut Their Payouts by More than 40% in the Last Year was originally published by The Motley Fool
