With regards to EDS, be really careful of believing in the dividend. Remember, this company has just announced that they will make 80% less than they previously led us to believe. With that much less money coming in, one has to wonder if they can sustain the current dividend level for very long. Almost all companies have guidelines about how much of their cash flow they can pay out in dividends, so if things are down hard, they're going to have to cut it.
Also, Merrill is saying that EDS sold puts on 2.5 million of its own shares at $62.90. That was an Enron move. It's a company destroyer in a down market. It'll wipe out any cash flow they have left, leaving nothing for dividends and maybe nothing at all.
I suspect that many of the big contracts they've talked about this past month will not materialize. After all, they were touting those contracts at the same SG Cowen conference earlier this month when they told us that their cash flow would be five times higher than they told us this week. I find it hard to believe that they were honest about their big contracts while overestimating cash flow by 5x, only weeks away from the end of the quarter.
They've been issuing commercial paper to pay for the put obligations. That's not good.
When investing for dividend yield, the first thing you've got to do is make sure the dividend is safe. In this case I think the dividend is extremely unsafe, given the horrible cash flow problems.
My own bet is that this one continues to unwind, ala Enron.
[Disclosure: Long EDS puts.] |
