The freefall continues for Corus Entertainment Inc. (TSX:CJR.B) as the dividend yield continues to soar into the atmosphere. At ~19%, the dividend yield isn’t just in the atmosphere, it’s about to leave orbit and those who continue to chase it will probably be left floating in the eternal space vacuum much like Elon Musk’s star man.
Why you should never assume that a stock’s bottomed out just because it’s fallen
Corus is in a secular decline. We’ve known that for years now, and while it seemed like the stock bottomed and was heading higher last year, you would have had been hit with a nasty surprise as the stock shed another half of its value after already losing half of its value in the years prior.
This goes to show that there really is no maximum amount a stock can drop, even though many beginners may think a maximum drop for a large-cap stock could be 50% at most. That’s a common fallacy, and there’s no better example of the potential repercussions of thinking this way than the Corus trajectory. It’s really ugly, and it could get even uglier as the dividend yield continues to move past the 20% mark.
Is the yield safe?
That’s the question many income investors have been asking themselves over the last few years. Is it safe at 8%? 10%? 14%? What about 19%?
While it appears that the dividend is sustainable for now, investors really need to ask themselves whether they really can expect a near 20% yield to last long enough to double up and thereby eliminate the effects of continually declining capital gains.
Although the fundamentals appear attractive from a deep-value investor’s perspective, I find the lack of forward guidance disturbing, as many investors have no idea how the stock plans to emerge from its funk. Although the stock is now dirt cheap, it can still get a lot cheaper.
With this in mind, I think Corus’ yield is a trap!
One should not be asking whether or not the stock is safe; investors should instead be focusing on the company’s fate in the longer term. How will Corus and its old-fashioned business survive and thrive in the age of cable cutting? Does Corus have a sound plan to adapt to this new age?
These are questions whose answer is clouded by a ton of uncertainty; however, over the next year, we’re likely to get further clarity on the company’s forward-looking plans as management sheds light on how they plan to recover moving forward.
At this point, an investment in Corus would be a shot in the dark. And by focusing on the yield, odds are that one will be left very disappointed a few years down the road. The stock is cheap, but it could get cheaper, and if the dividend finally gets cut, I think shareholders will have less of an incentive to stay the course despite many analysts belief that a dividend cut is already “baked in” to shares at current levels.
If you’re keen on investing in the name and you’re still confident in management’s ability to recover, I’d much prefer you wait for a dividend cut, which will likely come with some commentary from management on Corus’ direction moving forward. While the announcement may cause a rally, I think it’d be a wiser choice to ride the wave up than down using a dollar-cost averaging approach to minimize risk.
So, what should income investors do right now?
Add the stock to your radar and witness the slide on the sidelines as you stay up to date on new developments. There’s simply not enough forward guidance to make a decision at these levels. Blindly buying a stock just because it’s cheap is just as bad as chasing a stock because it’s the next big thing. They’re both investment decisions that are influenced by the fear of missing out.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.