Dividend Danger Zone: 3 Aristocrats on the Brink of a Payout Cut

Dividend Aristocrats are stocks that are members of the S&P 500 index and have raised their dividend payouts yearly for 25 years or more. It’s an exclusive list of companies. Of the thousands of stocks on the market, only 68 were cut. 

That shows just how difficult it is. Yet, becoming a Dividend Aristocrat doesn’t mean a stock will always be one. Earlier this year, Walgreens Boots Alliance (NASDAQ:WBA) was forced to cut its dividend to conserve cash. Before that, VF Corp (NYSE:VFC) slashed its payout by 70%. Both stocks were booted from the list.

Below are three Dividend Aristocrats to avoid. They pose the greatest risk of cutting their dividend. Although they might not, as companies go to great lengths to maintain their status, a close inspection shows why these stocks are in danger of doing so.

Albemarle (ALB)

Some investors might be surprised to learn that lithium producer Albemarle (NYSE:ALB) is a dividend aristocrat, let alone that it is one to avoid because it might cut its payout. The company owns one of the largest lithium mines at Greenbushes in Perth, Australia.

Albemarle was added to the Dividend Aristocrat list in 2019 and continues raising its payout to this day. Yet, being royalty doesn’t necessarily tell you the quality of the dividend. Although ALB stock is approaching its 30th year of increases, the growth rate has slowed dramatically. Over the past decade, Albemarle’s dividend has grown at a compounded annual rate of 3.8%, but over the last five years, it has grown to just 1.7% annually. That means investors are earning less on their dividends due to inflation.

Worse for ALB stock investors, the company typically generates negative free cash flow (FCF). Because companies pay their dividends out of the money they have left over after paying their bills, Albemarle’s negative 23% FCF payout ratio is a yellow flag. 

Again, the lithium producer may not cut its payout tomorrow, but that’s not a good sign. There are much better places for your money than Albermarle stock.

3M (MMM)

If there’s one Dividend Aristocrat most seen as likely to cut its payout, it’s industrial conglomerate 3M (NYSE:MMM). Because of the legal liabilities piled up against the owner of Post-It Notes and Scotch brand tape, it makes more sense to cut the dividend than use its cash reserves to finance it.

3M has paid a dividend for 66 years. So, not only is it an aristocrat, but it’s also a dividend king, meaning the payout has been raised for 50 years or more. Still, the company faces billions in legal liabilities for its military earplugs and more than $10 billion for environmental pollution from so-called “forever chemicals” to be paid out over the next decade or so.

3M also just spun off its one growth business, the healthcare business Solventum (NYSE:SOLV). Many companies cut their dividends after such spinoffs. AT&T (NYSE:T) cut its dividend in half when it spun off its entertainment division into Warner Bros Discovery (NASDAQ:WBD).

Although 3M’s FCF payout ratio is only 65%, much of those cash flows will go to Solventum. The conglomerate still owns almost 20% of the company, which means it will have much less FCF coming in. Management has committed to paying a dividend but hasn’t given a full-throated defense of increasing it.

Leggett & Platt (LEG)

Inner coil spring maker Leggett & Platt (NYSE:LEG) is the third Dividend Aristocrat to avoid. The mattress spring maker has been in business for 140 years and has raised its dividend for over 50 years. However, it’s business has been ailing. Inflation and high interest rates have hurt its primary business, which relies on the housing market. They also impact secondary ones like automotive and flooring. Those three industries account for 80% of Leggett & Platt’s revenue.

The stock is down 26% this year and off 37% over the past 12 months. The Federal Reserve is growing increasingly reticent about cutting interest rates, which could weigh further on Leggett’s fortunes. 

LEG stock is currently the highest-yielding Dividend Aristocrat, and though its FCF payout ratio is 65%, it is near to maxing out the leverage ratio set by its debt covenants. It may need to divert more resources to preserve its investment-grade debt rating, which hints at a possible dividend cut coming.

On the date of publication, Rich Duprey held a LONG position in WBA, MMM, SOLV, WBD, T and LEG stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.