As investors navigate the remainder of 2024, it may be wise to approach certain types of stocks with caution. Higher borrowing costs can squeeze profit margins and lead to reduced dividends, making these stocks riskier for income-focused investors, even as they come down slightly. Overall, keeping an eye on these trends and conducting thorough research can help investors steer clear of potentially underperforming stocks in the latter half of the year. And there are three I’d stay clear of for now in this case.
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BCE
Investors might want to steer clear of BCE (TSX:BCE) stock for several reasons as we head into the latter part of 2024. Despite its substantial market cap of $42.92 billion and a decent forward price-to-earnings (P/E) ratio of 15.58, BCE has faced some headwinds, with a 52-week decline of about 16.27% at writing. The company’s high debt load of approximately $39.5 billion, combined with a staggering debt-to-equity ratio of 197.43%, raises concerns about its financial stability. Its level of indebtedness could hinder its ability to invest in growth or maintain dividend payments if cash flows tighten.
Moreover, while BCE offers a tempting forward annual dividend yield of 8.48%, the payout ratio sits at a concerning 182.79%. This means the company is paying out more in dividends than it earns. This isn’t sustainable in the long run. With the competitive landscape in telecommunications becoming increasingly fierce, BCE’s ability to maintain its market position while managing such high debt could be a significant risk for investors. Balancing these factors, it might be prudent for potential investors to think twice before diving into BCE stock.
Suncor
Investors may want to consider avoiding Suncor Energy (TSX:SU) for a few reasons as we progress through 2024. Despite posting strong production numbers and generating $3.4 billion in adjusted funds from operations, the company has faced declining net earnings. These dropped to $1.568 billion in the second quarter (Q2) of 2024, down from $1.879 billion in the same quarter last year. This decline, coupled with a significant drop in quarterly earnings growth of 16.60%, raises questions about Suncor’s ability to maintain profitability in a fluctuating energy market. Additionally, the company’s reliance on oil prices can be a double-edged sword, as any downturn in crude prices could severely impact its financials.
Moreover, while Suncor has a solid market cap of $69.51 billion, its high debt levels at $15.57 billion could pose risks, particularly in a volatile economic environment. The total debt-to-equity ratio of 34.98% suggests that while the company is managing its debt, it still has substantial obligations that could limit its financial flexibility. With a forward annual dividend yield of 3.98% and a relatively modest payout ratio of 37.03%, Suncor might seem attractive for income investors. Yet the uncertainty around its revenue growth and profitability could make it a riskier bet. Therefore, investors may find it prudent to look for alternative energy stocks with more stable earnings and less debt exposure.
Cineplex
Investors might want to reconsider holding Cineplex (TSX:CGX) stock as we navigate through 2024, primarily due to its recent financial struggles. The company reported a significant decline in total revenues. This fell by 24.6% year over year to $277.3 million in Q2 2024, and attendance plummeted by 31.8% to just 8.7 million moviegoers. Even though Cineplex has plans for new locations and a normal course issuer bid to buy back shares, these strategies may not be enough to counterbalance the current downward trend in revenue and attendance.
Furthermore, Cineplex’s profitability metrics raise some red flags. The company recorded a net loss from continuing operations of $21.3 million, a stark contrast to a net income of $158.9 million in the previous year. With a current ratio of only 0.36, Cineplex’s financial health appears shaky, indicating potential liquidity issues. The fact that the company has not paid dividends since 2020 suggests that it may prioritize rebuilding its financial position over returning value to shareholders in the near term. Overall, the combination of declining revenues, increasing losses, and financial instability could make Cineplex a risky investment for those seeking stability and growth in their portfolios.
