Is Negative Dividend News Positive for the Stock Price?

Last week there were several companies that cut or suspended their dividend payments. As part of my studies to uncover market inefficiencies pertaining to dividend stocks I am measuring the performance of those dividend suspenders or cutters. As part of my sample I am measuring stocks which trade at least several hundred thousand shares per day. I am also measuring the decline or advance based off the opening price for the day on which the dividend cut or suspension was announced. This would be the price at which an ordinary dividend investor could have traded stocks after learning the news.

On November 10, American Capital Strategies (ACAS) announced that it was purchasing the remaining shares of European Capital held by investor. In addition to that this business development company announced that it will not pay any dividends for the remainder of 2008. ACAS stock opened at $9.81, and then surged to $10.58, before closing at $7.87, for a loss of 19.78% off the open.

LandAmerica Financial Group, Inc. (LFG) announced on November 10th that it continued to aggressively cut costs, suspended its quarterly dividend and had paused certain capital expenditures related to its Fusion initiatives, in order to preserve capital and address the declines in revenues. The stock opened higher after this news, but sellers quickly pushed the shares down 14% from the open.

Early on November 11th, KKR Financial Holdings LLC (KFN) suspended its dividend for the third quarter of 2008 citing unprecedented level of illiquidity in the global financial markets and the Company's determination that maintaining maximum flexibility through retaining capital. Investors rushed for the exits as the stock quickly fell 9.50% from the open.

Diana Shipping (DSX) declared a Q3 dividend of $0.95 per share on November 12, but suspended future dividends to position the company for market opportunities. The company also announced a $100 million dollar buyback. Despite the fact that the company did beat its third quarter earnings consensus, the stock fell twelve percent after the news of the dividend suspension hit the wires.

Prudential Financial (PRU) cut its 2008 annual dividend by 50% on November 12. The stock defied the odds however by finishing the day one percent above the opening price in the morning.

 

Euroseas (ESEA), which provides ocean-going transportation services worldwide, announced on Friday that it will cut the quarterly dividend to 20 cents/share. The stock closed 2% higher from the opening price.

Freeseas (FREE), which operates as an international drybulk shipping company, cut its quarterly dividend by 62.5% from $0.20 to $0.075 per common share on Friday. As a result its shares fell over 26% after the news.

There are two opposing viewpoints regarding dividend cutters or eliminators. The first group claims that companies that cut dividends are wise enough to conserve cash during difficult market conditions. A fellow blogger Ethan Bloch claimed that if an investor owns an interest in a business that they are committed for a long while and understand the business, it may not always be gospel to ditch the stock upon the announcement of a dividend cut or suspension.

The other viewpoint is that dividend cutters are not good for shareholders as they foretell more troubles ahead. If management has no other option but to cut the dividends, which in itself is a last resort of action and the board knows about those concerns, then the administration de facto admits that they have no control over the situation. Furthermore a dividend cut tells investors that executives are bearish on the business and believe that it won't bring in enough cash for the foreseeable future. With hindsight, selling stocks in the S&P 500 after a dividend cut in 2008 would have saved you a lot of money. This could have been a result of the weak market action overall of course.

Disclosure: Author has a position in ACAS.

Comments

[skipper54:]

I would say that a shipping company cutting dividends, within the present market, is indeed sending up a red flare. You won't see any red flares yet from companies which have stated that their priority is growth as opposed to yield but that doesnt mean to say they are not in the same boat as the erstwhile payers of dividends. But when the growth companies are forced to revalue their assets (the ships) that is when the Mayday signal will be heard loud and clear........(with apologies for the all the maritime metaphors).

2008 Nov 17 10:02 AM

[Itsonlymoney:]

I own DSX and while I am disappointed with the dividend cut, I am pleased with the buy back and the conservative management decision to build cash for further investment in distressed assets. Management is alert to opportunities and is not increasing debt. Both moves portend larger dividends in the future when markets recover.

Lets face it, if ships stop carrying grain, coal, and ore we have bigger problems in this world than dividends.

2008 Nov 17 10:38 AM

[Chris B:]

Look, if you bought these companies as they fell hoping for a 20+% dividend yield as advertised on yahoo.com, that was probably a poor investment strategy. A better bet might be to milk 3-4% gains out of their daily price movements, but that's still risky. There's no free lunch.

Think of it this way, if the company is paying 8-10% interest to borrow money to get them through this slump, would any responsible manager then send that money out as dividends, while leaving the liability on the books? If you owned the company, would you pay 8-10% interest to borrow money so you could pay yourself a dividend and put it in your savings account to earn 3-4%? If your competitors' future earnings could be bought for 1/4 of the price you would have been willing to pay before, would you prefer a dividend instead? Smart businesses are positioning themselves to take advantage. Maintaining a symbolic single digit dividend is irrelevant at this point. If you want yields, buy bonds.

2008 Nov 17 12:30 PM

[Ethan Bloch:]

Hey there, thanks for including my argument in your post... kick ass! However it is slightly altered. My stance isn't a one-size-fits-all, it only applies the business I own and understand.

Furthermore, I believe our main difference boils down to time or better put, the amount of time you plan to hold specific investments.

You are measuring performance of these stocks after a dividend suspension or cut, but your definition of performance, at least in this post, is a single day change in their stock price. What?! To me this is irrelevant.

Now I'm not acquainted with any of the companies you've referenced and
I don't want to get to meta here, but my investment approach involves owning businesses, businesses I understand, feel confidant in, and aren't going to discard into the waist basket due to a divined cut unless of course the economics of their business has in fact materially changed for good.

Hope that makes sense.

One last thought, I think it would be cool, since you talk about discovering market inefficiencies, that you post about investors and speculators overreaction to bad news i.e. dividend cuts and suspensions.

2008 Nov 18 03:54 AM

[aristid:]

dividend cut is good.
Share buy back in theese times seems to me waist of funds.
to wait for opportunities is the better management decision.

2008 Nov 23 07:12 AM

[aristid:]

dividend cut is good,
share buy back is waist of money
to wait for opportunities is good management

2008 Nov 23 07:13 AM