WARNING: A Dividend Cut Is Coming For This Stock
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One of the biggest pushbacks you'll always hear against dividend investing is that dividends aren't guaranteed. And to be honest with you, that's completely true.
Companies can set dividend policies. They can talk about their commitment to rewarding shareholders. They can even have long histories of paying dividends. But at the end of the day, a company can cut its dividend at any time.
The thing about dividend cuts, though, is that they don't typically come completely out of nowhere. More often than not, there are financial warning signs that start showing up well before a cut is announced.
I hate to say it, but one stock where I'm starting to see some of those warning signs show up right now is Vail Resorts (MTN). And if you want to learn about a few more stocks that look like potential dividend cut candidates, check out this video here.
In case you’ve never heard of this company before, Vail Resorts is one of the world's largest ski resort operators, owning more than 40 resorts across North America, Europe, and Australia. These include resorts like Northstar and Heavenly in Lake Tahoe, Park City in Utah, and Whistler up in Canada.
Now, personally speaking, I've always been an avid skier/snowboarder. I grew up about two hours from Lake Tahoe, so I’m very familiar with both Northstar and Heavenly.
Because of that, I've always been interested in owning Vail Resorts in my portfolio. The problem is that I can just never get past this business's fundamentals. It seems like a fun one to own, but not a great investment.
Source: Simply Safe Dividends
Looking at some of the financials, sales have at least been growing over the past decade. We'll give them that.
But the good in Vail Resorts' fundamentals starts and ends right there. Everything else, at least to me, looks troubling.
Source: Simply Safe Dividends
As you can see, both earnings per share and free cash flow per share have been declining over the past few years, and the margins tell a very similar story.
The company’s operating margin has gone from 23% in 2022 down to 16% in the last twelve months, while the free cash flow margin has fallen from 21% all the way down to just 6%.
So clearly, Vail Resorts is holding on to less and less of every dollar that it brings in. That's a big problem because if they can't fix the issue by either cutting costs somewhere or growing sales more than they have been, eventually they're going to have to free up cash somehow, and that's when the dividend can potentially be sacrificed.
Source: Simply Safe Dividends
Now, on the dividend side of things, on the surface, the payment history really doesn't look too terrible. For the most part, the dividend has grown quite well over the years.
There was a brief blip during the pandemic where management cut the dividend a couple of times, but they definitely brought it back with a vengeance afterward.
With that said, as you can tell from the chart, the dividend growth has really started to slow down over the past few years. In fact, the company hasn't increased its dividend since April 2024, which really isn’t much of a surprise considering what we saw in the financials.
Even though sales have continued growing, profits and free cash flow have been declining, which is naturally going to put pressure on the company's ability to continue growing its dividend.
Source: Simply Safe Dividends
Now looking at the payout ratios, this is where things really get concerning. Vail Resorts has been paying out more than it has earned in profits for the past three years, and it doesn't look like that's going to be changing anytime soon.
It's also been paying out as much, if not more, than it's generating in free cash flow. And to me, that's an even more worrisome sign that a dividend cut could be coming.
At the end of the day, a company can only pay out more cash than it generates for so long. Eventually, something has to give.
Management can borrow money, they can dip into their cash reserves, or they can even start selling off assets to continue funding the dividend. But none of those are ideal, and at the end of the day, they’d be a Band-Aid for a bullet wound.
At some point, the business either has to start generating more cash or it has to reduce the amount of cash it’s expending. And one of the easiest (and most unfortunate) ways to do that is by cutting the dividend.
Source: Simply Safe Dividends
Now back on the topic of borrowing money, the company actually has been taking on more and more debt.
As you can see, the net debt to EBITDA has been going up, the net debt to capital has been going up, and interest coverage has just been getting worse and worse as time goes on.
None of those metrics, by themselves, guarantee that a dividend cut is coming. But combined with everything else we’ve seen, it’s just another brushstroke on an overall troubling financial picture.
With all of that said, I would not be surprised to see Vail Resorts cut its dividend at some point in the future. I really hope they don't, but the situation isn’t looking too promising.
Have you ever been on the receiving end of a dividend cut? If so, what did you do? Write to me here and let me know.
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"When you have multiple companies in your portfolio, how do you decide which one you'll invest in on a given day?"
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This is a great question, and it really comes down to two things: valuation and position sizing. In other words, I ask myself which company looks like a good value today, and which position do I want to build out further?
For example, right now I'm focused on adding to my position in Rollins (ROL), which is the newest holding in my portfolio. I think it's at a great price right now, and because I haven't owned it for very long, I have plenty of room to add more shares without the position becoming too concentrated in my portfolio.
The tricky part is that there are usually at least a few stocks in my portfolio that look attractive at the same time. Right now, companies like Procter & Gamble (PG), VICI Properties (VICI), and Zoetis (ZTS) also look like solid buying opportunities, and I'd love to build bigger positions in all of them.
But since I only have so much capital to invest every week, I can't buy everything at once. Because of that, I try to just focus on building out one position at a time. And at the moment, that's Rollins.
I'll probably continue stacking up shares over the next few months. Once it reaches the size I'm shooting for (around 5-6% of the portfolio), I'll revisit things, see which other holdings look good, and repeat the process.
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