Sell Block: Analyzing Alcoa’s Dividend

Cramer has enjoyed paraphrasing George Orwell’s Animal Farm lately to describe dividends: some are more equal than others. The point? While these company payouts offer great protection from a volatile market, some yields are just too good to be true. So investors have to do a bit of research to know whether or not that dividend is safe.

Take Alcoa as an example. The world’s largest aluminum producer has dropped to $6 from $44, boosting the dividend yield to 11.4%. At first glance, that looks great. But often times a high yield signals trouble, such as that precipitous drop in share price. Most likely there’s a legitimate reason that happened.

Alcoa’s balance sheet is a mess right now. The company held $10.6 billion in debt at the close of 2008, compared to just $762 million in cash. Alcoa should get about $1 billion once it exits its joint venture with Rio Tinto, but that’s probably still not enough to cover the dividend.

The earning’s picture is just as bad. As a measure of safety, Cramer looks for companies whose earnings are twice that of their dividends, which is why Alcoa makes him nervous. AA expects to lose 70 cents a share in 2009 – and that’s after losing 70% of its earnings power in 2008. Put simply, the company is losing more money than it expects to pay in dividends.

An RBC research note also pointed to trouble, saying that Alcoa will have to borrow another $1.5 billion to fund its 2009 spending plans. Cramer doubts the company can afford to keep its dividend at these levels – 68 cents a share annually – if that’s the case. Maybe Alcoa could capital expenditures to make the payout, but that in and of itself would be reason to sell the stock. Alcoa is either unprofitable and taking on debt to pay a big dividend or the dividend will be cut out of necessity. Regardless, investors don’t want to be anywhere near this stock.

Another culprit to watch is BB&T . Good news from Citigroup , Wells Fargo and JPMorgan Chase offers reason to be more positive about the sector than before, but there’s something specific here that should concern people: BB&T is the only bank to borrow TARP funds that hasn’t yet cut its dividend. As good a regional bank at BB&T is, Cramer said, he’s not sure this company will buck that trend.

Cramer’s charitable trust owns JPMorgan Chase and Wells Fargo.

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