Don't Let this Double-Digit Dividend Fool Ya
Roundy's (NYS: RNDY) , a supermarket chain based in Milwaukee, offers a dividend yield of more than 16%. But, in the same way that a grocer puts the best strawberries on top, that attractive dividend yield covers some very ugly product underneath. Crushed by debt and starving for profits, Roundy's won't achieve any long-term goals for Foolish investors.
A look at the reasons
Roundy's operates in a very competitive sector, with tight margins and low profits against giants such as Wal-Mart
A major threat to the operations of the company emanates from the disturbingly low interest coverage ratio, the number of times a company can make its interest payments with earnings before taxes and interest. With so much debt, Roundy's will have a very difficult time improving its stores, or pricing to increase profits and attract more customers.
The high dividend payout ratio also imperils the ability of Roundy's to fund future business growth. The dividend payout ratio is the amount of earnings utilized for paying the dividend. The grocery store industry average is 30%; Roundy's tops 80%. That makes it very difficult for Roundy's to compete, when so much of its earnings are dedicated to paying the dividend and servicing the debt, rather than expanding operations.
The Kroger Co.
Net Profit Margin
Dividend Payout Ratio
Interest Coverage Ratio
Value trap, not value play
Valuations become alluring when a stock falls in price. Roundy's has steadily fallen by more than 35% in 2012. That lures unwitting investors, tempted by a shrinking price-to-earnings and price-to-book ratio, with a soaring dividend yield that seemingly looks more attractive. But, like Supervalu
Quarterly EPS Growth Rate
Price Decline for 2012
Too much like Supervalu, for comfort
Like Supervalu, Roundy's high dividend likely aims to keep investors from heading for the checkout line. But, with its staggering debt load, troubling interest coverage ratio, and falling EPS, Roundy's should not be paying a dividend. Indeed, management has warned that the high debt might curtail future dividends.
Foolish investors should ignore the temptations of its high dividends and low valuations. Before anyone can consider it a worthwhile long-term holding, Roundy's needs to increase its earnings and lower its debt.
While Roundy's finances are not suitable for long-term investing, these three stocks can help you achieve your goal of retiring rich. The best investing approach is to choose great companies and stick with them for the long term. Roundy's is not there yet. But in our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
The article Don't Let this Double-Digit Dividend Fool Ya originally appeared on Fool.com.Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool owns shares of Supervalu. Motley Fool newsletter services recommend Supervalu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.