3 Beaten-Up High-Yield Dividend Stocks: Are They Bargains?

By Markets Fool.com

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Among retirement investing nerds, nabbing a high-yielding dividend stock while it's down is akin to catching "The Big One" while you're out fishing -- everyone has a story, but few can back it up with facts. This is my attempt to help you go fishing.

Telecom player Frontier Communications (NASDAQ: FTR), bread maker Flower Foods (NYSE: FLO), and supplement provider GNC (NYSE: GNC) all are providing sizable dividends, and all are down substantially over the past year.


Dividend Yield

One-Year Returns




Flower Foods






Data sources: Yahoo! Finance, Google Finance.

Let's see if any one of these three can provide the type of long-term compounding magic that can help you retire comfortably.

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The single most important metric

When it comes to dividends, there's nothing more important than free cash flow (FCF). This represents the amount of cash a company puts in its pocket from operations minus any capital expenditures. At the end of the day, it is from FCF that dividends are paid, so we want to make sure that a company has given itself enough of a cushion to make the payments sustainable.

Over the past four years, here's how each company's FCF and dividend payments have stacked up.

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Data source: Yahoo! Finance. TTM=Trailing 12 months.

From this data alone, we can throw Frontier out of the running. The company's FCF trends are heading in exactly the opposite way that we'd want to see. It has recently spent hundreds of millions of dollars to acquire properties from some of the nation's biggest telecom players. Management claims that it will help FCF in the long run, but the switchover in service has been so bad that customers are up in arms over poor service.

What's wrong at Flower Foods?

Flower owns some of the most popular brands of breads in the world, foremost among them Nature's Wonder and Wonder Bread. The company's key advantage came from the fact that the entire industry was largely fragmented and, via acquisition, Flowers was able to figure out a way to scale distribution to a point where the business could be very profitable.

The problems, however, are twofold. First, the company's legacy breads like Wonder Bread are falling out of favor fast. Between a movement toward organic food (which Flowers is involved in via acquisition) and toward gluten-free food, the trends are decidedly against the company.

Furthermore, the company's drivers are asking to be recognized as employees, instead of independent contractors. They have initiated a class action lawsuit, and the U.S. Department of Labor has announced that the company will go under a Fair Labor Standards Act compliance review.

Even though Flower's dividend is pretty safe -- only 60% of FCF has been used to pay the dividend over the past year -- I would be extremely cautious here. Its distribution model is what makes Flower so profitable, and if the drivers are taken on as employees, that could destroy the company's margins.

GNC in the age of e-commerce

GNC is an absolute cash machine. Over the past two-and-a-half years, FCF has increased 83%. Even though it has a 3.9% dividend yield, it has only used 17% of its FCF to pay the dividend. That means that the quarterly distribution is very safe.

But what about the underlying business?

GNC is on the defensive on two fronts. First, the supplements provided by third parties have been under heavy scrutiny over the past year from federal authorities. Not only do these investigations mean that GNC could lose profitable products but it's bad press for the company.

The second problem is that competition from others -- particularly those focused on selling the products via the internet only -- is eroding any moat the company once had. While earnings have ticked up over the past few years, that's largely because of share buybacks. And those buybacks have been paid for with both FCF and debt. That's not a sustainable plan.

With same-store sales continually shrinking, I don't think the underlying business at GNC is healthy enough for your investment dollars.

Maybe next time?

So now you see why nabbing a quality, cheap, high-yielding dividend stock is so difficult: There's usually a reason these stocks are cheap. I would not suggest putting your cash behind any one of these players.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends Flowers Foods. 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.