A 6% Yield on the Verge of an Upgrade?

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Safety Net

Kindred Healthcare (NYSE: KND) has a problem.

The stock pays a fat 6.1% dividend yield. It’s paid a $0.12 per share dividend each quarter since 2013.

But SafetyNet Pro rates Kindred poorly.

The company hasn’t been able to afford its dividend since the first year it started paying one.

In 2014 and 2015, it paid shareholders more than it made in cash flow.

2016 is an even worse situation…

The company’s cash flow is expected to be negative $45 million. Meanwhile, it paid out $40 million in dividends.

Essentially, that’s the whole problem. Kindred Healthcare doesn’t make enough money to pay its dividend.

No matter how good a company’s dividend-paying track record is, it’ll have a low SafetyNet Pro rating if a company can’t afford to pay its dividend.

It’s just like having a perfect history of paying your debts – but having such large debts that the monthly interest exceeds your income. Your credit rating wouldn’t be too high, and you’d have a tough time getting a mortgage.

However, there’s reason to be optimistic about Kindred.


The company operates hospitals, nursing and rehab centers, and offers in-home care.

It was bleeding money due to its skilled nursing business.

But Kindred is exiting that business, which is expected to dramatically improve cash flow.

In fact, after selling off the skilled nursing segment, Wall Street forecasts Kindred to generate $97 million in free cash flow this year – more than enough to pay the $40 million in dividends.

Should the company even come close to meeting Wall Street’s figure, we’ll likely see SafetyNet Pro upgrade its dividend safety rating.

But until it proves that it can generate enough cash flow to pay shareholders, its dividend has to be considered unsafe.

Another variable is how hospitals will fare after a repeal of Obamacare.

Hospitals were big beneficiaries of the Affordable Care Act, as more insured patients used their services. Hospitals had fewer write-offs for uninsured patients who couldn’t pay their bills.

(The new year may be difficult for hospital companies, but that’s not the case for the whole healthcare sector. Tune in to my January 19 LIVE briefing to find out which biotech stocks will soar during Trump’s first 100 days in office. Read below for full details.)

Depending on how fast the law is repealed and what it’s replaced with, Kindred’s fortune – and the fortune of other hospital operators – could change dramatically.

Dividend Safety Rating: D

If you have a stock whose dividend safety you’d like me to analyze, leave a comment with the ticker symbol.

Good investing,

Marc

Editor’s Note: Trump’s moves to deregulate the healthcare sector spell major profits for select biotech stocks. If you’re interested in getting the list, you must join Marc for 100 Days of Profits, The Oxford Club’s first-ever presidential webinar, on January 19, at 8:00 p.m. EST.

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