Zacks Investment Ideas feature highlights: Ship Finance International, Hot Topic and Nordic American Tanker Shipping

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Jun 29, 2011, 09:30 ET

CHICAGO, June 29, 2011 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: Ship Finance International Limited (NYSE: SFL), Hot Topic Inc. (Nasdaq: HOTT) and Nordic American Tanker Shipping Ltd. (NYSE: NAT).

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3 Dividends in Jeopardy

Listed below are 3 companies with dividends that are at risk of getting cut.

Ship Finance International Limited (NYSE: SFL) currently yields a tempting 9.1%. The company owns and operates ships - a very capital intensive business.

The company's payout ratio currently stands at a lofty 88%, and it has paid out more in dividends than it has generated in free cash flow over the last two years. Ship Finance actually cut its dividend in half back in early 2009, but has raised it in each of the last 5 quarters.

However, the company has been issuing a lot of debt recently and has nearly $1.9 billion in long-term debt compared with just $90 million in cash and equivalents on its balance sheet. That's not much of a safety net if things turn south.

First quarter earnings came in well below expectations as operating cash flow fell 47% year-over-year. Analysts revised their estimates significantly lower, sending the stock to a Zacks #5 Rank (Strong Sell). Based on currently consensus estimates, earnings per share is expected to decline 11% in 2011.

Unless Ship Finance International can turn things around and significantly boost its free cash flow, don't expect that dividend to last very long.

Hot Topic Inc. (Nasdaq: HOTT) currently yields an enticing 3.8%. The specialty retailer began paying a dividend just a year ago, but it may have been premature.

Profits have been falling since 2009, and in 2010 the company lost money. Hot Topic is also expected to report a second quarter loss of 10 cents per share in August.

The cash flow picture is a little better since Hot Topic carries no long term debt, but if the company expects to grow without slashing its dividend, it's going to have to turn things around rather quickly.

Based on its current rate, the company needs to pay out around $13 million a year in dividends. It generated just $4 million in free cash flow in 2010, however.

Nordic American Tanker Shipping Ltd. (NYSE: NAT) is an international tanker company. It owns and operates double hull crude oil tankers.

The company pays a dividend that yields 5.4%. NAT has paid 55 consecutive quarterly dividends, but its quarterly payout is almost as volatile as its stock price. The company states that "When the (shipping) market is down we do not "cut" the dividend, we adjust it, depending upon the general spot market freight level for suezmax tankers."

Well, the market better turn around quickly for NAT. The company has reported two consecutive quarterly losses and is expected to report a loss of 9 cents per share in August.

The company has produced negative free cash flow of $264 million over the last two years while paying out $175 million in dividends. That can't go on forever.

The Bottom Line

Dividends are a great way for investors to boost their total return. While high-yielding stocks may seem enticing, keep in mind that dividends at that level often get slashed. Be sure to calculate a company's payout ratio, or better yet, its dividend payments to free cash flow.

These 3 companies all currently pay out a significant portion of their cash flow through dividends. Unless they can boost earnings and generate more cash, their dividends appear to be at risk.

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