5 Most Heavily Shorted Dividend-Paying Stocks: Buy the Dip or Pass?

Perhaps the thing most characteristic of the meme stock craze of 2021 was the large short positions in stocks like AMC, GameStop and BlackBerry. A focused assault by hordes of retail investors squeezed the shorts, who were then forced to run for cover. Short covering drove the price of these stocks even higher.

Could it happen again? Never say never, but the equity market is far different today than it was a year ago. Then, there were piles of cheap (even free) money available. That is no longer the case. Inflation was running at around 2%, and Bitcoin traded at around $60,000. Those were the days.

Even with equity prices currently tanking, however, short sellers continue to behave as if some stocks still have a long way to fall. Will a heavily shorted stock that pays a dividend be able to attract enough investors to evade a collapse in its price?

We screened U.S. equities for dividend-paying stocks with more than 20% of the floated shares sold short. We found only a dozen, and only five of them had dividend yields of more than 4%. Nine of the dozen are consumer discretionary stocks, and the top five were all retail stocks of one kind or another. That should be no big surprise, given that the first things most consumers give up when times get tough are things they can get along without.

American Eagle Outfitters

Specialty retailer American Eagle Outfitters Inc. (NYSE: AEO) is expected to report first-quarter fiscal 2023 results later this month. The consensus analyst outlook is not groovy. Revenue is forecast to be 24% lower sequentially, while earnings per share (EPS) are expected to be 25% lower than in the January quarter. Year over year, revenue is projected to improve by 11.7%, while EPS are forecast to drop by 45.8%.

As of Wednesday’s close, Fintel reported that 26.5% of the company’s floated shares are short, a year-to-date high. At its current trading price, AEO stock’s implied gain is nearly 110%.

The company pays an annual dividend of $0.72, yielding 5.33%. The company’s payout ratio is 27.15%, and its free cash flow for the past 12 months was $69.8 million ($0.41 per share). The average daily trading volume on the stock is around 6.2 million shares.

Big Five Sporting Goods

In mid-November of last year, shares of Big Five Sporting Goods Corp. (NASDAQ: BGFV) surged to an all-time high. Since then, the stock has dropped more than 68%. According to the latest short interest data from Fintel, 41.7% of the company’s floated stock is sold short.

When the company reported March-quarter results earlier this month, EPS came in about 10% higher than the consensus estimate and revenue slightly below the estimate. The bad news is that Big Five issued second-quarter EPS guidance of $0.40 to $0.50, lower than the estimate of $0.79 from the single analyst covering the stock (Buy rating, $23 price target). Second-quarter same-store sales are forecast to see a high-teens percentage decrease, following a record second quarter in 2021.

The stock’s 52-week trading range is $12.93 to $47.65. The low was posted on Wednesday. Big Five pays an annual dividend of $1.00, for a yield of 7.68% and a payout ratio of 71.75%. The average daily trading volume is less than 1 million shares. Free cash flow for the past year was $37.8 million, or $1.72 per share.

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