Since we are Halloween, I thought of doing something different and highlight a few “horror stories” in the dividend investing world. Several investors wrongly think that investing in paying dividend companies is a safe move. That once their money is invested, they will continue to receive their check quarterly without any worries. Unfortunately, there are several companies that can’t keep up with their promises and this end-up in nightmares for investors. Here are a few stories I’ve followed throughout the past few years… I’m telling you, this post is not for the faint of heart 😉
RadioShack (RSH)
No graphs available as the company filled bankruptcy in 2015.
Funny enough, RSH was part of my first “Best 2012 Dividend Stock” series. Here’s what I wrote about the company at that time:
RadioShack is a retailer of electronics and services. Instead of using large stores similar to Best Buys, RadioShack has privileged a higher number of stores (4,486 in US, Puerto Rico and Mexico). Along with its RadioShack stores, the company also operates several kiosks. They have 1,267 kiosks located within Target and Sam’s Club stores.
While the sales are stagnating, RSH has kept increasing its dividend. With a low payout ratio (12.86%) and a high yield (5.1%), the company will be able to sustain this dividend payout for a long time. I’ve picked RSH to be part of this eBook because of its low P/E ratio (7.6) and the fact that Best Buys is struggling to post strong financial results. The company is also repurchasing $200 million of shares in 2012.
This sounds like a pretty good start. In my books, I also write a section about the company’s weakness. Here what I wrote about RadioShack:
RadioShack faces a lot of competition from Best Buy and Wal-Mart. Because of a high dividend and the fact that RSH lost a lot of value on the market in 2011, this could be a risky but an interesting pick.
I guess it was more risky than interesting! RSH continued to post worst results in 2012 and the following 2 years led the company to bankruptcy. RSH didn’t adapt to the shift to the online business and basically killed their own store by keeping a very small distance from each other. The company also concentrated a lot of their energy in the mobile selling business. It’s never a good idea to have 50% of your revenue coming from a single activity…
Yellow Pages (previously YLO.TO, now Y.TO)
Source: ycharts
In the 2000’s Yellow Pages was cherished by many Canadian income seeking investor. The company offered a very stable business model as YLO offered businesses to register in their “yellow page book” that was delivered across the country. What is more interesting than a company owning the biggest market share in a highly repetitive business? Well, YLO offered even more than that! It was also an income trust sharing 90% of their profit with their shareholders. The dividend yield was between 8% and 10%… what a great deal isn’t?
Unfortunately, in 2010, Yellow Media slashed its payout to shareholders when it converted from an income trust to a corporation in 2010 and was hit hard by the transition to the online business. Nobody wanted to look into a paper registry and rather look for companies on Google.
Two years later, the company was about to declare bankruptcy until management came up with a highly controversial saving plan. The plan, completed in December that year, had bondholders convert their debt into shares and diluted the value of existing shareholders’ equity, but allowed the company to shed about $1.5-billion in debt. This is when they stock started to trade under Y.TO. The company is now back on track, but there isn’t dividend payments anymore. This is food for thoughts for investors with “safe” 8%-10% yielding stocks…
Mattel (MAT)
Source: Ycharts
Back in 2013, everything was going well with Mattel. It was even part of my 2013 Best Dividend Stocks. For the record, the company went up 31.11% that year. Here’s what I wrote about Mattel back then:
Mattel is one of the biggest toy manufacturers, marketers and distributors. It has an impressive portfolio of brands including all-star names such as Fisher-Price, Little People, Barbie, Hot Wheels, Polly Pocket along with several Disney, Comic Book and Cartoon characters and derived products.
In October 2012, Mattel topped estimates and even raised Holiday sales forecasts. With a very strong brand portfolio combined with an increasing consumer confidence, MAT is going through the Holidays with a smile. With its world leader position, Mattel will continue to rack-up the sales in 2013. The dividend payout ratio is low and the 5 years dividend growth (12.28%) shows a strong dividend policy.
Then again, I’ve also filled a warning for the upcoming years:
The switch from traditional toys to electronic definitely affects MAT. The traditional toy market and most important retailers (such as Toys’R’Us) have been facing slow growth while computer games, gaming consoles and tablet games have been increasing significantly. It will be interesting to see how Mattel will react to this “new” substitution product in the future.
The stock price then lost 42.18% between January 2014 and December 31st 2015. This was a very difficult period for the company as it showed its business model vulnerability linked to the “old school” toys. Barbies and other toys couldn’t sell that well and while its competitor Hasbro (HAS) was picking up more growth due to their toy licensing model (making toys for popular movies for example), Mattel struggled and had to stop increasing their dividend. Their latest dividend increase was made in 2014.
The story doesn’t seem to end in such a bad way compared to RadioShack and Yellow Pages. Mattel is now slowly coming back with better financial performances. However, I would stay away from this company for a while. I definitely prefer Hasbro (HAS) that we hold in our best performing portfolios.
Black Diamond (BDI.TO)
Source: Ycharts
Black Diamond Group was another of my great pick in 2013 based on very strong fundamentals. Here what was the story back then:
Black Diamond Group rents modular structures to provide services and camps for temporary workforces and work structures. Black Diamond also offers a wide variety of oilfield accommodation equipment. Their services go from temporary offices to full-service lodge. Their slogan makes me smile: “We were HERE before HERE was HERE”. Their main market is obviously Western Canada.
Black Diamond focuses on predictable and recurring cash flows from long term projects. The company is showing high speed growth both in terms of sales and profits. It keeps a relatively high dividend growth policy at the same time as ensuring sales growth. BDI is not limited to oil sand exploitation and seeks to grow its business in the USA as well. Their fleet size is continuously increasing but its % utilization remains over 80%.
The company continued to rise until 2014 when the oil industry seriously slowed down. Here was my warning back at the beginning of 2013:
BDI is directly dependant of new exploitation projects in “hostile” environments. A slowdown in the oil sand industry could limit their high speed growth. The other potential problem would be if their fleet utilization is reduced as their main assets would not be as productive.
It appeared that I was unfortunately right about the company’s weakness. The stock dropped like a rock (you can see the red line in the graph). Management had cut their monthly dividend from $0.08/share to $0.05 and then to $0.025. We had sold our position after the first dividend cut.
How can you avoid those horror stories?
It’s obviously easy to play Monday morning quarterback and look at what happened to those four companies after the facts. I could have picked many other companies showing similar stories of success before falling hard. Unfortunately, those kind of horror stories are legions and we all suffered from at least one of them. In an ideal world, we would find a way to avoid as many bad companies as possible.
In an effort to achieve this important task, I’ve established the 7 dividend investing principles. By following a very precise and efficient investing process, we have been able to build strong and outperforming portfolios for the past 3 years. I don’t think I hold the secret to dividend investing, but I know the secret lies within a strong investing methodology. This is the only way you can avoid big losses in your portfolios.
Thank you for revisiting those “horror stories”. I also find it helpful to go through investments where I made a mistake, mostly for the learning opportunities value. And luckily, I keep making new learning opportunities available for myself ;-0
Codifying basic investment tenets can only be helpful in eliminating some errors from occurring more than a few times.
Hey DGI,
Bad transactions are as beneficial as good ones. It helps us becoming better investors :-).
Cheers,
Mike
Great and cleaver post idea 🙂 It’s incredible to think that so many companies missed out on the whole internet shopping revolution (in ref to RSH and YO) . Pundits had been talking about it for years before it finally took off, so it’s strange to think that these companies never saw it coming. Bestbuy, Sears, Blockbuster, etc…
As for my own horror stories, either I haven’t been trading long enough or I’ve simply been lucky, because I can thankfully say that none of my investments have ever tanked this badly! I’m sure that day will come.
Thanks for posting
Interesting article. My horror stories include Mattel and Century Link. Both failed to keep up with changes in technology. I also lost money on two commodities companies — because they did not have an economic moat and no control over prices.
I have never been burned by retail stocks because I never buy such stocks. Sooner or later someone will come along and sell it cheaper and/or faster.
Thx for these speaking examples.
We should always be vigilant and on the outlook to see if the portfolio still goes well.
I too was caught by the Yellow Pages fiasco. Definitely a lesson learned! Unfortunately I had transfered my holdings to my TFSA before the collapse, so I couldn’t even use the capital loss to offste any gains.
One additional commenton Y.TO. Following the dilution by converting debt to shares (under the new ticker of Y.TO), there was a reverse split of approx 200:1. So shareholders of the YLO.TO ticker would still hold new shares, but at a drastically reduced price/share count! My own share count went to *six* shares following the conversion.