Dump These 3 Steel Stocks as Tariff’s Rip Up the Industry

The imposition of a 25% tariff on imported steel by President Trump has certainly been a headline grabber. But it obscures the long-term problems faced by the U.S. steel industry.

And it only addresses one side of the classic economic equation for any commodity – supply and the industry’s struggle against cheap imports. The share of the U.S. steel market taken by imports was only 26.9% in 2017, up slightly from 2016’s level of 25.4%.

The other part of the equation is demand and that remains a sore spot. There is a genuine long-term weakness in domestic demand for steel. The only bright spots on that front are the auto and the shale oil and gas industries.

Related: Trump’s Trade War Set to Cost This Automaker $1 Billion: Sell Now

The decline in U.S. steel output since the 1970s is clearly seen in this graph. 2017 estimated steel use in the U.S. was 110 million metric tons, which was far below the 136 million ton level in 2006, before the financial crisis. U.S. steel production was up 3% in 2017, but capacity utilization remains low at 74%. In other words, there is still overcapacity in the U.S. steel industry based on current demand.

And the situation could get worse. . . . .

Higher Prices = Lower Demand

A basic economic principle is that higher prices lead to lower demand. And the steel tariffs mean higher prices for manufacturers in the United States that use steel. So unless US steel-using manufacturers are also protected from imports by tariffs, they will end up being losers on the global stage because the higher steel cost will make them uncompetitive. That’s the slippery slope you get on when you begin imposing tariffs – you have to end up shielding more and more industries.

Before Trump acted to impose tariffs on steel, forecasters had been predicting a decent year for the steelmakers. Growth in steel demand, as forecast by the consultancy Wood Mackenzie and others, was expected to be in the 7% range. But if higher costs start pricing US manufacturers out of world markets, that expected rise in demand will quickly disappear and jobs could even be lost.

The solution – instead of tariffs – would have been to begin moving forward on President Trump’s dream of rebuilding America’s deteriorating infrastructure. For example, there are more than 54,000 bridges in the United States that need to be repaired or replaced, according to the American Road and Transportation Builders Association. Just think about how much steel would be needed to just tackle that problem.

And there’s a whole lot more in infrastructure that needs to be done… that’s why the American Society of Civil Engineers most recent report card gave U.S. infrastructure an overall grade of D+. The report also said that if our country’s investment gap is not addressed by 2025, the U.S. economy will lose nearly $4 trillion in GDP.

In simple terms, if you want to be competitive globally in the 21st century, you need a 21st century infrastructure and not one a hundred years old.

Stay Away From Steel Stocks

I do not expect the United States to seriously address its infrastructure problem. Therefore, I do not see additional demand coming online any time soon for U.S. steelmakers. And there is a related problem the U.S. steel companies have…

That is, some of their mills are simply inefficient and uncompetitive. This has been a decades-long problem for the U.S. steel industry, even going back to just after World War II. U.S. steel producers held on stubbornly to old technology – the so-called ‘open hearth’ steel production method. Meantime, the Europeans and everyone else adopted the more efficient ‘basic oxygen’ process.

Of course, other newer steelmaking technologies are in use today, but the roots of the decline of the American industry began then. By the time the U.S. steel industry modernized (after begging for protection against those darn foreigners), it had already lost its spot as the world’s steel kingpin.

As the famous quote attributed to Mark Twain says, “History doesn’t repeat itself, but it often rhymes.”

Therefore, I expect the benefits of the tariffs to the steel companies to disappear as quickly as a morning fog on a hot summer day.

This makes the stocks of the steel companies un-investable or, if you have a high risk tolerance, outright shorts. Especially at these elevated price levels, which seemed to have all the possible good news already factored in.

Related: Here’s Why You Need to Buy These 3 Metals Stocks Today

At the top of the list of steel stocks to avoid is U.S. Steel (NYSE: X), which saddens me because my grandfather used to work for the company.

Vertical Research Group analyst Gordon Johnson recently said on CNBC that the operating costs for the company are up, meaning the tariffs will offer little benefit.  Johnson specifically pointed to the soon-to-be-reopened Granite City mill in Illinois as “one of the least efficient steel mills in the world”.

U.S. Steel is also facing operational issues in its flat-rolled division with increased outage and plant maintenance costs rising. The company sees higher plant-related spending as it accelerates its efforts to revitalize this unit. Maintenance and outage expenses for the flat-rolled unit for 2017 increased by $341 million on a year over year basis. The company expects maintenance and outage spending for 2018 to be similar to 2017.

The second stock on the no-touch list is AK Steel Holding (NYSE: AKS). Like U.S. Steel, it faces planned maintenance outages in some facilities, affecting production. The company recorded outage costs of $85 million in 2017 and in 2018, it expects expenses associated with planned outages to be about $50 million.

But there are other, bigger problems for AK Steel. AK Steel’s cost structure is higher than its peers due to its greater reliance on external supplies of raw materials. It pays nearly double for iron ore pellets compared to its integrated competitors, who consume their own pellets. The company saw higher year over year costs for raw materials such as iron ore and other alloys in the fourth quarter and raw material cost inflation is expected to continue throughout the year.

Finally, a broad way to play the chronic overcapacity in the global steel industry is through an exchange traded fund – the VanEck Vectors Steel ETF (NYSE: SLX).

The top positions in the fund (27 stocks make up the fund) are the mining firms that produce the aforementioned raw materials needed for steel production like iron ore. However, it is still loaded with steel-producing companies from all over the world. About half the stocks in the portfolio are U.S. steel industry companies.

It would not surprise me to see this ETF slide from its current price near $50 into the $30s or even $20s.

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7 Dividend Stocks That May Be Hurting Your Retirement

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Two key goals in retirement are to generate safe income and preserve capital. No one wants to outlive their nest egg.

Dividend-paying stocks are a popular asset class used to generate predictable, growing income. However, unlike the interest income paid by government-backed Treasury bonds, a common stock dividend can be far more discretionary in nature. When times get tough, a business will typically opt to reduce its dividend before jeopardizing its ability to meet its debt obligations, preserve its credit rating or invest in its long-term growth projects.

Unfortunately, a number of businesses are facing the tough decision to reduce their dividend at any one moment.

To alert investors of stocks that have the highest risk of reducing their current dividend in the future, Simply Safe Dividends created a Dividend Safety Score system that analyzes a company’s payout ratios, debt levels, recession performance, cash flow generation, recent earnings performance, dividend longevity and more.

Dividend Safety Scores are available for thousands of stocks, and scores range from 0 to 100. A score of 50 represents a borderline safe payout, but conservative investors are best off sticking with companies that score over 60 for Dividend Safety.

Investors can learn more about Dividend Safety Scores and view their real-time track record here(since inception they have flagged 99% of dividend cuts in advance).

I used Dividend Safety Scores to identify seven companies that have either recently cut their dividend and remain in trouble, or that could be facing a dividend cut in the near future. Owning companies like these can hurt a conservative retirement portfolio.

Dividend Stocks to Avoid: Frontier (FTR)

Dividend Stocks to Avoid: Frontier (FTR)

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Dividend Yield: 0% (Dividend is currently suspended)

Dividend Safety Score: 1 (Very Unsafe)

Frontier Communications Corp (NASDAQ:FTR) finally bit the bullet and completely suspended its dividend in February 2018. The company had a Dividend Safety Score of 1, signaling a very unsafe payout, from Simply Safe Dividends before its cut announcement was made.

Frontier has reported a net loss the last two fiscal years and is saddled with debt, in part due to its poor decision to acquire some of Verizon’s fiber assets in 2016 for $10 billion.

The firm’s weak financial position has made it very challenging for it to make the investments in its communications networks that are necessary to remain competitive.

When combined with Frontier’s large debt load, sizable dividend and ongoing customer losses, management’s decision to eliminate the payout isn’t a big surprise.

Investors seeking high-yield replacement ideas can review analysis on our favorite high-dividend stocks here.

Dividend Stocks to Avoid: CenturyLink (CTL)

Dividend Stocks to Avoid: CenturyLink (CTL)

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Dividend Yield: 12.7%

Dividend Safety Score: 3 (Very Unsafe)

CenturyLink Inc (NYSE:CTL) is one of the largest telecom services providers in America and sports a juicy yield north of 10%.

The company closed its $34 billion acquisition of international service provider Level 3 Communications in late 2017 to become more focused on serving businesses rather than consumers. The combined company has more than 10 million landline phone connections, over 5 million broadband internet subscribers, a few hundred thousand satellite TV subscribers, and a large focus on enterprise IT services.

CenturyLink is no stranger to dividend cuts, having reduced its payout in early 2013 (CTL’s stock tumbled more than 20% on the news). And another dividend cut could be in the cards, with Simply Safe Dividends assigning the company a very weak Dividend Safety Score of 3.

Legacy wireline phone services have been in decline for years as wireless phones continue replacing them. As a result, the company’s primary cash cow has been shrinking at a double-digit pace, causing its payout ratio to spike above 100% last year.

Investors are hoping the company’s Level 3 acquisition will successfully diversify CenturyLink’s cash flow away from declining legacy landlines and result in a more sustainable dividend profile.

Unfortunately, CenturyLink had to take on substantial debt to do this deal, and its sales and margins continued contracting last quarter.

Investors can learn more about CenturyLink’s Level 3 acquisition and how it impacts dividend safety here.

Overall, CenturyLink’s management team appears to have a very slim margin for error, and the dividend is on shaky ground. Conservative income investors are likely better off going elsewhere for reliable dividends and capital preservation.

Dividend Stocks to Avoid: Government Properties Income Trust (GOV)

Dividend Stocks to Avoid: Government Properties Income Trust (GOV)

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Dividend Yield: 12.5%

Dividend Safety Score: 3 (Very Unsafe)

While Government Properties Income Trust (NASDAQ:GOV) has not raised its dividend over the last five years, income investors can’t complain about the stock’s generous 8% average dividend yield during this time.

GOV current yields more than 12%, but unlike recent years, the stock is increasingly looking like a yield trap. In fact, Simply Safe Dividends assigns the company an extremely low Dividend Safety Score of 3.

GOV is a real estate investment trust which owns over 100 properties leased primarily to the U.S. government and state governments.

Unfortunately, governments are looking to become much more efficient with their spending, including reducing the amount of office space per employee.

Analysts expect GOV’s adjusted funds from operations (AFFO) per share to slip more than 15% over the next 12 months, which will push the company’s AFFO payout ratio to nearly 130%.

When combined with the firm’s substantial amount of debt, a meaningful dividend cut could be on the horizon.

Dividend Stocks to Avoid: GlaxoSmithKline (GSK)

Dividend Stocks to Avoid: GlaxoSmithKline (GSK)

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Dividend Yield: 6.8%

Dividend Safety Score: 30 (Unsafe)

GlaxoSmithKline Plc (ADR) (NYSE:GSK) has kept its dividend frozen since 2012 and has impressively paid uninterrupted dividends for nearly 20 consecutive years. When combined with its high yield and seemingly conservative payout ratio below 40%, it’s no wonder why the stock is popular with income investors.

However, the pharmaceutical giant is facing real growth struggles as branded and generic competition eats away at the pricing of its core drugs.

With pressure to continue expanding and its dividend consuming a meaningful amount of cash flow, it’s not out of the question that GlaxoSmithKline might opt to reduce its dividend to free up growth capital and keep its balance sheet in good shape.

GlaxoSmithKline has a Dividend Safety Score of 30 from Simply Safe Dividends, indicating that its payout is potentially unsafe and has a heightened risk of being cut in the future.

Income investors can learn more about GlaxoSmithKline and the safety of its dividend in the research note here.

Dividend Stocks to Avoid: Waddell & Reed (WDR)

Dividend Stocks to Avoid: Waddell & Reed (WDR)

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Dividend Yield: 5.1%

Dividend Safety Score: 12 (Very Unsafe)

It’s no secret that the actively managed investment fund industry is under pressure. High fees, generally poor performance and an ever-growing number of low-cost passively managed funds are all factors putting pressure on companies like Waddell & Reed.

The company’s earnings have steadily declined since 2014, pushing its dividend payout ratio up to close to 90% last year. As a result, management ultimately decided to slash the firm’s quarterly dividend by 46%.

Simply Safe Dividends had assigned the company a Dividend Safety Score of 12 prior to its reduction announcement, signaling high risk of a payout cut.

Unfortunately the outlook remains somewhat grim for the business, largely driven by continued performance struggles and relatively high fees that averaged 66.5 basis points last quarter.

Less than 30% of Waddell & Reed’s fund assets were ranked in the top half of their group by Morningstar over the past three-year performance period. Not surprisingly, Waddell & Reed continues to see a couple billion dollars of asset outflows each quarter.

Should the market take a tumble, the business would come under further strain. Investors looking for a higher quality business in this industry can review our research on T. Rowe Price (TROW) here.

Dividend Stocks to Avoid: Dine Brands Global (DIN)

Dividend Stocks to Avoid: Dine Brands Global (DIN)

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Dividend Yield: 3.6%

Dividend Safety Score: 4 (Very Unsafe)

Dine Brands Global Inc (NYSE:DIN) owns or franchises more than 1,900 Applebee’s and nearly 1,800 International House of Pancakes (IHOP) restaurants throughout the country.

The full-service casual dining industry has come under pressure in recent years. More consumers are opting for quick-service restaurants, which typically offer lower prices, better food quality and shorter waits to support an on-the-go lifestyle.

Dine Brands Global saw its adjusted earnings per share decline by more than 30% in fiscal 2017, driven largely by a 5.3% decline in Applebee’s comparable same-restaurant sales.

This pressure ultimately caused the company to lower its dividend by 35% in February 2018 to free up cash for brand investments and support its stretched balance sheet.

Simply Safe Dividends had issued the company a Dividend Safety Score of 4 prior to the dividend cut announcement, signaling that the firm’s payout was potentially very unsafe.

While the new dividend amount appears to be more sustainable for now, the business remains under press. The stock’s new yield sits close to 3.6%, which isn’t very competitive with other income options given the payout’s weak growth potential going forward.

Dividend Stocks to Avoid: Macquarie (MIC)

Dividend Stocks to Avoid: Macquarie (MIC)

Dividend Yield: 15.1%

Dividend Safety Score: 20 (Very Unsafe)

The market usually does not like surprise dividend cuts, and Macquarie Infrastructure Corp’s(NYSE:MIC) decision to reduce its payout by 31% in February 2018 was no exception.

MIC’s stock tumbled as much as 40% on the news and remains in the dumps. Not only do dividend cuts reduce retirement income, but they can permanently lose an investor’s hard-earned capital.

The infrastructure company’s management has historically run the business with a relatively high debt load and elevated payout ratio, reflecting the fairly predictable results its assets generated but retaining little cash with which to plow back into growth projects.

A new CEO started in late 2017 and decided to monetize several major assets at the company for a hefty profit. As a result, cash flow will fall and the dividend needed to be adjusted down with it for the rest of 2018.

A lower dividend also allows the company to fund more of its growth projects with internally generated cash flow rather than depend more on capital markets to raise funds.

Simply Safe Dividends had slapped the company with a “Very Unsafe” score of 20 prior to its surprising announcement.

Conservative investors can consider cutting their losses and moving on to other investment opportunities with safer, faster-growing income.

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