While stocks that return high dividends may seem attractive, they may come with the risk of shareholders ending up paying back more than they would expect. All that glitters may not be gold and this stands true for the stock market as well. According to latest analysis, there are three stocks that should raise red flags for investors.
Of these, PetMed Express (NASDAQ:PETS) is one such stock that signals red to analysts. It is known as 1-800-PetMeds and is an online veterinary pharmacy. The annual dividends for the stock totals up to 5%, which seems quite enticing. However, the figures don’t sum up convincingly, if looked closely.
According to statistics, PetMed (NASDAQ:PETS) payout ratio for the past twelve months totals up at 82%. However, the free cash flow and payout ratio is 111%. While it may seem quite attractive to a novice, it does raise an eyebrow. This is due to the concern that a company of the size of PetMed (NASDAQ:PETS) should invest more of its FCF in business expansion, rather than paying this capital towards the dividend payouts. The current market cap for PetMed (NASDAQ:PETS) is $270 million.
It is highly recommended for PetMed (NASDAQ:PETS) to reinvest the generated revenue in expanding the business scope. In the previous five years, the yearly revenue has slipped 2% and the operating margin has declined 29%, whereas the net income has dipped 31%. In the last quarter, PetMed (NASDAQ:PETS) reported $2.7 million worth of profit, which translates to $0.14 per share. This is a decline from the previous year’s quarter revenue of $4.2 million, which translates to $0.21 per share. The revenue dipped 4.8%, to $57.6 million. The Thomson Reuters had consensus on a total revenue figure of $61.2 million that translates to $0.21 per share.
PDL BioPharma (NASDAQ:PDLI) is another such company that draws negative publicity from analysts, even with considerable attractive figures up on the board. The annual dividend yield sits at an impressive 7.43%, with price-to-earning ratio at 3.7. On an average, the stock yield is crudely guessed at 2.4%, with a forward P/E going over 20. However, the danger bell rings when considering the 23% short interest in the company.
PDL (NASDAQ:PDLI) generates profits by means of licensing its patent portfolio. The main reason for analysts to consider it a dangerous investment is due to the fact that its most prominent ‘Queen patent’ is expected to expire at the end of the month. This will in turn force the company to make some significant investment in new sources of income. The company might have capital saved up from its lawsuit against Genentech, from February last. This leaves the company with two years to find and buy patents in a way that covers up for loses from its Queen patent revenue.
Another such company is GlaxoSmithCline (NYSE:GSK) that pays huge amounts towards its annual margins. The dividends vary over quarters, with the largest amount paid in Q4. Furthermore, the dividend payment is in GBP and gets further reduction due to switch to stronger dollar.