The equity market continues to rally since the start of the new year, and returned just over 7% near the end of May. Although the bulls and bears stay firm in their opinions of the market, the dividend universe has already reached considerable milestones in 2017.

We use DIVCON® to assess the health of any dividend-paying stock on the S&P 500. To make our tool even more actionable, we forecast dividend increases or decreases of each stock within the next 12 months, assigning the stock a DIVCON score. While we are very excited about the future of dividend growth, here are four stocks that may cut their dividends.

  1. Alcoa (ticker: AA) – DIVCON 1

 After an earnings beat in April, many believed that Alcoa may be able to stage a rally in 2017. Last year, the former heavyweight stock shed its partnership with Arconic, and set out on its own path after a spinoff. On a macro level, the corporation reported expectations of excess demand in aluminum, which may invite a haircut to earnings. The stock hasn’t increased its dividend for years, and may put the dividend on the chopping block if its cash reserves dwindle. All of Alcoa’s DIVCON factors, like earnings-per-share (EPS) growth expectations, and free cash flow, all clock below average figures, weighing down its DIVCON score.

  1. Wynn Resorts (ticker: WYNN) – DIVCON 1

It is without question that Wynn Resorts offer guests a relaxing, luxurious experience. But, the stock’s DIVCON score doesn’t don’t appear so glamourous. With one dividend cut so far in 2017, and a DIVCON 1 rating, the resort stock may experience another dividend reduction. The 67% dividend cut[1] was attributed to weak first-quarter earnings, leading the company to announce a payout of only $0.50 cents, down heavily from $1.50 the previous quarter. One of the biggest factors for the stock’s bottom-shelf DIVCON score is its lopsided ratio of buybacks to dividends. To date, the stock has approved a buyback program amounting to $1 billion[2], and has lowered its dividend. Instead of raising dividends, the stock may continue to divert cash flow to buybacks.

  1. American Capital Agency Corporation (ticker: AGNC) – DIVCON 1

 The migration of investments from lower yielding investments into higher yielding stocks is now an old story. However, real estate was one of the biggest recipients of the jump into high-paying income stocks after 2008. Now, rising interest rates and a dip in housing demand may present a challenge to real estate investment trusts (REITs). DIVCON’s analysis reveals that AGNC’s has had a spotty dividend history over the last five years. AGNC’s dividend may be cut, rated DIVCON 1.

  1. Centurylink Inc. (ticker: CTL) – DIVCON 1

 Centurylink is the final stock on our list of potential dividend cutters. After posting a 20% decrease in earnings[3], the stock appears to be experiencing a rough patch overall, not just its dividend. As the telecommunications firm gears up for its $24 billion acquisition of Level 3 Communications[4], the newly formed corporation may continue to contend with weak earnings-per-share growth, weak cash flow, and potential complications after integration. Centurylink has had a DIVCON 1 score for at least a year, and its dividend growth potential may experience interruptions in the future.

The Reality Shares DIVCON Dividend Defender ETF uses a hedged strategy (long/short), with 75% of the fund holding U.S. large-cap stocks with high DIVCON ratings in a long position. The remaining 25% of the ETF aims to capitalize on potentially dividend cutting stocks by holding short positions in stocks with low DIVCON scores. As of 6/15/17, the ETF has a 2.37% holding in Centurylink.

 

Curious if any of our other DIVCON strategies hold these stocks? See the table below:

dividend growth strategy

As our DIVCON ratings are updated every quarter, these ratings may change. But, from our analysis, we conclude that these stocks show a high likelihood of a dividend cut, which may reveal future challenges in its price growth, and limits to total return in the long-run.

Learn more about DIVCON here.

 

Definitions:

Short Position: An investment strategy where securities are borrowed and sold immediately with the intention of buying back the security at a lower price. Shorting is used when investors believe a security will fall in value.

Real estate investment trust: A security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs receive special tax considerations and typically offer high dividend yields.

Free cash flows: Ratio of levered free cash flow to dividends.

Earnings per share (EPS) growth: Growth in earnings per share over the last 12 months.

Buybacks and repurchases: Ratio of previous 12-month share repurchases to dividends.

DPS growth: Dividend actions (increases or decreases) in the last five years.

 

[1] Wynn Resorts, Limited, Wynn Resorts Limited Reports First Quarter 2017 Results, April 25, 2017

[2] StreetInsider, Wynn Resorts Ltd (WYNN) Adds $420M to Stock Buyback Plan, April 20, 2017

[3] Centurylink, Centurylink Reports First Quarter 2017 Results, May 3, 2017

[4] Centurylink, Combination Proposed, February 13, 2017