Companies facing dividend cuts due to COVID-19 pandemic

David Trainer, New Constructs CEO, joins Yahoo Finance Live to discuss the impact coronavirus is having on companies and those that are at risk of dividend cuts because of it.

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MYLES UDLAND: All right, welcome back to Yahoo Finance Live. Myles Udland here in New York. We're joined now by David Trainer. He's the CEO of New Constructs. And David, I want to talk about something that we've discussed here on the program from time to time but we haven't, I think, done the work-- I know we haven't done the work that you guys have done in looking at dividends, and which dividends could be at risk.

Because you can kind of go down the list here in the S&P and you're going to see some crazy dividend yields given what company stock prices have plunged to versus what they're paying out. As you kind of go through the universe of companies at risk for cutting their dividend, I guess just start with, you know, what criteria you're looking at first.

DAVID TRAINER: The first thing we like to look at is the cash flows of the business. In our report published a week ago, we identified those companies whose cash flows were most negative compared to dividends. So for example, Noble Corporation had negative $4 billion or so in cash flow and they paid out $1 billion in dividends for around a $5 billion-plus deficit in cash flow versus dividends.

And our thinking is, look, if cash flows over the last five years-- which were relatively good economic times, right? If cash flows weren't good then, then what are they going to look like now? And how are they going to be able to afford the dividend?

We also looked at companies, we made sure, that didn't have a lot of net cash. Most of these companies were net debt companies on this list. And so the likelihood of cutting is even higher, because they're going to probably have a hard time issuing more debt or issuing more equity, and they don't have a lot of cash to draw.

JEN ROGERS: Hey, it's Jen Rogers here. Let's get to the good stuff. Let's name names. What's at the top here?

DAVID TRAINER: Yeah, the top of our list we have Sinclair Broadcast Group, ticker SBGI. Their deficit of free cash flow versus dividends over the last five years was over $9 billion. The dividend yield's up to 4.6. And their current free cash flow yield, or how much free cash flow they've lost over the last 12 months relative to enterprise value, is 67%. So a negative 67% free cash flow unit.

So they don't have any money. They've got quite a bit of debt, not a lot of cash, and they got a big dividend obligation out there. That's the top of our list.

Invesco, a financial company-- ticker IVZ-- is next on the list. They had a $7 billion free cash flow deficit. Their dividend yield's up to 13% and their free cash flow yield is negative 46%.

And number three on the list is also a financial company, Jefferies Financials Group. Their free cash flow deficit is $2.4 billion. Their dividend yield is 4.2% compared to a negative 13.5% free cash flow yield. So there's 15 total on this list, plus another 10 REITs.

We put REITs-- I'm sorry, utilities. We put utilities in a different category, because they're rate protected in some ways. But 15, and another 15 or so utilities for a total of 30 stocks that we see as having the riskiest dividend yields.

ANDY SERWER: DT, that's great stuff. I love it. And it's your hall of shame, not your hall of fame, just to be clear. those. Are not things you like. Those are things you don't like.

Interesting-- and some industries that I wouldn't have considered too, you know, because I think maybe oil and gas. But I want to ask you, like, is there any sort of rule of thumb that you can use as sort of an ordinary retail investor and just say, OK, when a yield reaches x versus like the S&P 500, those guys are bad guys and you should avoid them? Because you know, I like juicy yields. But obviously if they're too good, that's flashing red lights.

DAVID TRAINER: You know, I'm with you on that. We're always looking for shortcuts, because doing all this work-- going through filings, which we specialize in doing. We're the footnotes nerds, so to speak. It's a tough job. And it's not for retail investors.

And even traditional databases have been shown in recent studies to be incomplete and missing data. So it's hard to get the good data, period, these days-- not surprising, right? Wall Street wants to keep the good data for themselves.

You know, look, I'd say anytime dividend yields get up over like 6% or 7%, you probably want to take a closer look. But there's really no substitute, in our opinion, for really understanding core earnings and free cash flow. That takes a lot of work.

There are a few websites that do that really well. You have to look for them, though. It's a specialty focus. And it hasn't been that popular in recent years, because let's face it, you know, cash flows haven't mattered too much in the valuations of certain stocks, like Tesla and Salesforce.com and Netflix, to name a few.

But yeah, I would say, you know, 6%-plus, you need to start taking a closer look. But at the end of the day, if you really want to put your head on your pillow at night and trust your portfolio, you want to do some diligence on fundamentals.

RICK NEWMAN: Hey, David. Rick Newman. So I ask you about the retail investor. I mean, there are high-dividend ETFs that make it easy to go in that group. That's kind of a mild recession strategy, you know, move over to quality. Has that just blown up? Should retail investors just forget about high-dividend ETFs and that type of investing?

DAVID TRAINER: Well, we're going to be putting out a report today on the riskiest ETF dividend yields in the market as well. And the methodology there is the same thing. We're looking at ETFs that hold stocks who we don't think are going to be able to sustain their dividend, because they lack cash flow.

And I think in general, you know, the ETF investment strategy has been a shortcut, right? It's substituting diversification for diligence. We're just blindly putting money in a bunch of stocks as opposed to a couple of stocks.

And that's better than just putting money in single stocks. But I would highly encourage people to look at ETFs from firms like Wisdom Tree and others that are actually doing real diligence on the underlying holdings and putting ETFs together based on things like earnings power and things like that, where there's some intelligence with respect to the ETF.

But a lot of these sort of kneejerk or simple strategies that worked well in good markets, yeah, they're going to blow up in bad markets. And really, all that means is that the strategy probably wasn't that good to begin with.