These 3 Dividend Stocks Could Slash Their Payouts

By Markets Fool.com

Investors looking for dividend stocks need to be careful not to chase yield. Investing in some high-yielding stocks could be a recipe for disaster as those high-yield stocks turn into low-yield stocks if management decides to cut the dividend. That's why investors need to ensure those dividends are safe and well within the means of the businesses paying them out.

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The three dividend stocks examined in this article -- Seagate Technology , Las Vegas Sands , and Mattel -- are all in danger of cutting their dividends in the near future.

Seagate Technology

When a stock pays a dividend yielding 12.8%, the market is trying to tell you something: This isn't sustainable. Seagate's $2.52 annual dividend payout is 147% of its estimated earnings per share for fiscal 2016 (ending in June). Earnings growth in 2017 still isn't expected to cover the entire dividend. While it's still generating enough cash from operations to cover its $750 million in dividend payments, analysts expect it to continue declining in fiscal 2017 to somewhere between $800 million and $1 billion, getting awfully close for comfort.

More important, Seagate is facing pressure from a weak PC market and general overall weakness in tech spending. Seagate's management has mentioned that it needs to restructure the business to focus more on the enterprise cloud-computing opportunity, but it hasn't given any details except that it plans to shift from a 60/40 consumer-enterprise split to a 40/60 split.

The growth in adoption of flash memory is a significant threat to Seagate as well. Seagate's mission-critical hard drives sold to enterprises came in 700,000 units below management's previous forecast. 25% of those mission-critical drives are the faster 15,000 RPM drives that carry higher gross margins than its other products including the 10,000 RPM drives that make up the rest of the product category. On the company's third-quarter earnings call, management noted 15,000 RPM drives are "the primary area where we are seeing a shift in low-end servers moving to lower-capacity Flash SSDs, and we expect this trend to continue."

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With a payout ratio well above 100% and cash flows that are expected to dive below $1 billion next year, Seagate's dividend will be difficult to sustain. With plans to restructure its business toward the enterprise market, it may need some more breathing room, which means a dividend cut for investors.

Las Vegas Sands

If you're into gambling, Las Vegas Sands might be the stock for you. If you're into collecting safe dividends, then keep walking. Las Vegas Sands paid out $2.8 billion in dividends over the past year, but generated just $2 billion in free cash flow. And free cash flow is expected to continue falling as the company invests in expansion plans for the Cotai Strip and potential plans in Japan and Korea. Management is confident that it can do both expansion and return capital to shareholders, but I wouldn't bet on it.

Meanwhile, Sands is facing pressure from a stagnant gaming market, particularly in Macau. Macau's chief executive forecast casino revenue to fall to its lowest level since 2010. China's slowing economy and a crackdown on corruption has led to a significant decline in gambling on the former Portuguese colony. Meanwhile, other casinos are developing their own properties in the region, which will generate even more pressure on Las Vegas Sands to attract tourists to its resorts.

With a payout ratio of 124%, earnings per share that aren't expected to catch up to its dividend payout until 2018, and poor free cash flow, Las Vegas Sands is headed toward a dividend cut in the near future.

Mattel

I scored an exclusive interview with Business Executive Barbie for this article, and she told me to put Mattel on this list.She might be upset because Mattel continues to see a decline in the popularity of its Barbie dolls. Last quarter, Barbie sales fell another 6% year over year, sending the stock down sharply. The dividend now yields 4.9%, but it'll be tough for Mattel to sustain it.


Image source: Flickr/Mike Mozart.

Mattel's payout ratio is also above 100% with its $1.52 annual dividend coming in above analysts consensus 2016 earnings estimate of $1.37. Additionally, it paid out more than 100% of its free cash flow in dividends over the last 12 months.

Mattel faces pressure from Hasbro, which won the Disney contract last year to produce Disney princess dolls starting in 2016. That line represented $455 million in sales for 2015, 7% of its total. Additionally, Mattel's missing out on the new lines of Star Wars toys that will be coming out in the coming years in conjunction with the movie releases.

With declining sales, the loss of a major licensing deal, and an already perilous position with its dividend payouts, even Business Executive Barbie would stay away from Mattel.

The article These 3 Dividend Stocks Could Slash Their Payouts originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.