High interest rates could pressure companies to cut dividends. These names may be at risk, Wolfe Research says

Published Thu, Jun 13 20242:42 PM EDTUpdated Thu, Jun 13 20244:11 PM EDT

Investors' hoped-for interest rate cuts aren't materializing anytime soon, which could spell bad news for some dividend-paying stocks, according to Wolfe Research. Federal Reserve policymakers on Wednesday kept their key interest rate at a target range of 5.25% to 5.50%, noting that even as the economy has made progress on inflation, the central bank isn't yet ready to start dialing back on monetary policy. "We see today's report as progress and as, you know, building confidence," Fed Chair Jerome Powell said at Wednesday's post-meeting press conference , referring to May's cooler-than-expected consumer inflation report. "But we don't see ourselves as having the confidence that would warrant beginning to loosen policy at this time." Dividend-paying companies might feel compelled to cut their dividends if they're grappling with a lot of debt, as higher rates raise leverage costs for companies. "We expect more dividend cuts in the quarters ahead as lagged impacts of rate hikes impact certain corners of the economy and consumers more than others," Chris Senyek, chief investment strategist at Wolfe Research, wrote in a May report. He added that dividend cuts can also serve as a "clearing event" for a stock, ironically spurring a period of outperformance. To that end, the firm drew up a list of companies that are potentially at risk of cutting dividends based on their leverage and higher dividend payout ratios. In its screen, Wolfe looked for companies with dividend yields exceeding 3.5%, high leverage, a dividend payout ratio above 80%, or a dividend/free cash flow to equity coverage that's greater than 80%. See below for a few of the potential contenders for dividend cuts. Vail Resorts , an operator of ski resorts and owner of the Epic Pass, made Wolfe's list. The stock is down more than 15% in 2024, and it offers a dividend yield of nearly 5%. Earlier this month, JPMorgan cut its rating on Vail to underweight from neutral and slashed its price target to $176 from $217. Analyst Matthew Boss pointed to several headwinds facing Vail's business model, including price pushback from consumers after three years of fee hikes and saturation of the season pass model. Vail also cut its guidance for full-year total reported earnings before interest, taxes, depreciation and amortization to a range of $825 million to $845 million, compared with earlier guidance of $849 million to $885 million. Wolfe also called out Wendy's . The burger chain, known for its Frosty dessert, is off by 13% in 2024 but pays a dividend equal to a yield of 5.9%. Goldman Sachs initiated coverage of Wendy's on Thursday with a sell rating, noting that "risks around breakfast and slowing [same-store sales] offset unit growth story." "Despite projecting a ramp in unit growth over the upcoming years, guidance remains in the low-single digits (+2% for FY24, +3-4% for FY25), which we believe will be partially offset by continued slowing in SSS, resulting in muted revenue growth," wrote Goldman analyst Christine Cho. Nordstrom also turned up on Wolfe's screen. Shares are up about 17% in 2024, and the stock has a dividend yield of 3.5%. In late May, the clothing retailer posted fiscal first-quarter results that fell short of what Wall Street expected , even as its off-price chain Nordstrom Rack outperformed. The Nordstrom family has been weighing taking the department store private . Other names that made Wolfe's list of potential dividend-cut contenders include Best Buy , Whirlpool , Kenvue and Blue Owl Capital .