The greatest danger of any dividend position right now is from a cut to the dividend payout. That kind of cut would send even an already crushed stock lower.
I think that’s the possibility facing shares of ONEOK (OKE) when it reports earnings on April 28. The stock went ex-dividend on April 24, meaning that if you sell now you still collect the quarterly payment in May. The yield has climbed to 13.52% as the share price has plunged by 61.79% in the last three months.
So I’m selling shares of ONEOK out of my Dividend Portfolio today with a 50.43% loss since I added them to this portfolio on December 31, 2016.
The problem isn’t ONEOK–this is a well run and well positioned pipeline company with an enviable set of assets in natural gas liquids. The company has expanded its pipeline network to include more low-cost production from the Permian Basin.
Even the acquisition of OneOK Partners in 2017 will, in the long run, turn out to have been a smart move.
But in the short run the deal that had the company acquire the assets of its former master limited partnership has left ONEOK with a bushel load of debt at a time when investors and lenders are extremely leery about debt levels at energy companies. Long-term debt at ONEOK has climbed to $12.48 billion at the end of 2019 from $8.87 billion at the end of 2018. I think the company is under pressure from banks and big institutional investors to lower that debt load by buying back debt at its current depressed price. That might even be the best use of cash in terms of return on investment available to the company right now.
The problem is that with prices and demand in the energy sector crushed this year, ONEOK doesn’t have a lot of spare cash sitting about. The most obvious source of funds for any debt buyback would be some of the $1.5 billion or so in dividends paid to shareholders.
In my opinion, the dividend is in danger–because of this competing use for the cash and not because of any danger of insolvency at the company. And if the company is going to trim the dividend to buy back some debt, the logical time to broach that strategy would be the April 28 earnings report and conference call.
I’m taking advantage of the 3.90% pop in the shares in today’s rally to sell this position out of my Dividend Portfolio. I’d consider rebuying once the danger of a dividend cut is behind investors.