This High-Yield Stock Just Cut its Dividend: Could These 2 Be Next?

Vermilion Energy (TSX:VET)(NYSE:VET) just disappointed investors with a dividend cut. Why Gamehost (TSX:GH) and Chemtrade Logistics (TSX:CHE.UN) could be next.

| More on:
question marks written reminders tickets

Image source: Getty Images

After months of speculation, Vermilion Energy (TSX:VET)(NYSE:VET) made it official on Friday, announcing that it would cut its dividend by 50%. The payout will drop from $0.23 per share on a monthly basis to $0.115 per month.

Despite the dividend cut being good news for Vermilion’s future, shares still tanked on the news. The stock fell 18% during Friday’s trading. The dividend cut will save some $250 million per year — cash that can be spent on share repurchases or additional capital spending.

Part of the reason that shares were so weak is because of weakness in the overall oil market — pressure that could remain for a while. Some investors were also upset that Vermilion kept paying a dividend in the first place, insisting that its cash flow should be put to work in other ways.

The energy market looks to be volatile over the near term, meaning that many investors used the dividend cut as an excuse to exit their positions, putting further pressure on the stock.

Vermilion’s dividend cut had been speculated for months. Now that it has finally made the bad news official, which Canadian companies are next?

Let’s take a closer look at two additional dividend cuts that could happen sooner rather than later.

Gamehost

Gamehost Inc. (TSX:GH) is an Alberta-based casino and hotel operator. The company owns three casinos in Calgary, Grande Prairie, and Fort McMurray, as well as a couple of hotels. With both energy and travel spending drying up, the company could be on shaky ground.

While I don’t have many doubts about its long-term survival — Gamehost’s balance sheet is strong, it has a reasonable cash cushion, and it owns good long-term assets — the next few quarters could be particularly ugly. It could burn through its cash reserves quickly, especially if it keeps paying a dividend as operating profits turn into losses.

After all, one of the first things you cut when the economy starts to look bleak is trips to the casino.

Recent weakness in the stock price has pushed Gamehost’s yield all the way up to 9.1%, giving management a great excuse to cut the dividend and conserve cash. And remember, Gamehost has put investors though a dividend cut once before, back in 2016. The company could very well do it again.

Chemtrade Logistics

Chemtrade Logistics (TSX:CHE.UN) is in the specialty chemical business, producing materials needed by the refining, water treatment, and pulp and paper industries. It’s easy to see how a slowdown in the global economy would impact such a company.

There’s little separating one chemical manufacturer from the next; each provides a commodity product with customers caring mostly about price.

Capacity will stay the same as demand for many of these products decrease, which could lead to price wars. The last thing a chemical processor needs is valuable equipment staying idle.

One of the tricky things about Chemtrade’s business is the company doesn’t have a lot of wiggle room, even during good times. The entire business is built on plants running at full capacity, and gross margins are razor thin.

Chemtrade has also experienced issues over the last couple of years that have weakened the business, including a lawsuit surrounding the practices of a company it acquired. While management has put cash aside to deal with it, there’s always the risk these reserves won’t be enough.

Chemtrade generated enough cash flow to cover its distribution in 2019, earning $295 million in adjusted EBITDA while paying out just $111 million in distributions.

But a dividend cut looks more likely on a distributable cash flow basis. The company paying out $1.20 per share in distributions while only earning $0.89 per share in distributable cash flow.

Fourth-quarter numbers were particularly weak, with Chemtrade earning just $0.02 per share in distributable cash flow.

Besides, the stock currently yields 14.3%. It’s ripe for a dividend cut.

The bottom line

Vermilion Energy will likely be the first of many dividend cuts, especially if any coronavirus-related weakness sticks around for a few months. High-yield investors should brace for the worst.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns shares of Gamehost Inc.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »