Markets Punish Dividend Cutters

As part of my long term dividend strategy, I tend to buy and hold a portfolio of several dividend growth stocks. If a company keeps increasing their dividends or at least maintains it, I would keep holding the stock. If the company however decided to cut its payment for whatever reason, I lose confidence in the business model and immediately try to sell my position.

Some fellow bloggers do not agree with me on the issue of selling right after a dividend cuts. They believe that the market is efficient, and that negative dividend news is already priced into the stock when the cut is announced. Selling right after a dividend cut is a losing proposition since you are selling low and buying high.

There were several stocks that cut or suspended their dividend payments over the past week. Their performance after the dividend cuts reinforces my belief that companies that cut their dividends for whatever reasons admit that they do not have a firm grip on their business. As a long term dividend investor I want to buy stocks in companies which have the strong determination to overcome any cyclical downturns.

KeyCorp (KEY) announced on November 20 that it cut its dividend for the second time in 2008 to $0.0625/share. The stock lost over one fifth of its value at the close of the session on November 21st, compared to the opening price for the day. That’s also during a large one day surge for the markets.

The New York Times (NYT) announced on November 20 that it cut its dividend by 73.8% to $0.06/share. The stock lost over one seven percent of its value at the close of the session on November 21st, compared to the opening price for the day.

Whitney Holding Corporation (WTNY) declared a 35% reduction of its dividend to $.11 per share on November 19. The stock was slightly changed off the open and managed to increase by over three percent by the end of the week.

Eagle Materials Inc (EXP) announced on November 18 that it cut its dividend in half to $0.10/share. The stock lost 8% of its value at the close of the session on November 19th, compared to the opening price for the day.

The Board of Directors of Royal Caribbean Cruises Ltd. (RCL), decided to discontinue the company's common stock dividend, which is a move to enhance the company’s liquidity during this period of heightened economic and financial market volatility. This was one week after competitor Carnival Cruise also suspended their dividend payments. The stock proceeded to lose 30% of its value by the end of the week, following the announcement.

Navios Maritime Holdings (NM) announced on November 17 that it cut its dividend from 0.09 to $0.06/share. The stock lost around one third of its value by the end of the week, following the announcement.

Liberty Property Trust (LRY) announced Novwember 17 that its Board has approved a 23.4% reduction in its quarterly dividend from $0.62 to $0.475 per common share. The stock proceeded to lose over 29% by the end of the week.

AMB Property Corporation (AMB) suspended its Q408 dividend on November 17 as the company projects that it has already met its 2008 dividend distribution requirement. Together, these actions are expected to improve the company's cash position on a go-forward basis. These dividend changes will allow the company to retain $53 million of cash in Q408 and an additional $98 million over the course of 2009. Furthermore the board of directors announced that they expect to pay out $1.12/share in 2009 compared to the previous annual dividend rate of $2.08/share. The stock gained 15% off the open on the day of the announcement but further market weakness brought the loss for shareholders to over 13% for the week.

The average performance of all dividend cutters in the first day of the announcement was 9% loss on average, as measured from the opening price for the day. This is the third week in a row where dividend cutters get punished severely by the markets. It would be interesting to see whether performance of dividend cutters improves when the markets stabilize.

Comments

[Brad Ferris:]

I have no doubt that the companies who now have the additional cashflow available to grow their balance sheets or aggressively pay down debt will benefit with a higher share price. The only concern is that investors have a long memory when it comes to dividend cuts and there's times when its difficult to attract retail investors into a stock that doesn't meaningfully pay you a return for your capital.

2008 Nov 25 10:58 AM

[Boubou:]

Several industries, such as shipping pay most of their profits as dividends, for good reasons. Shipping is cyclic, volatile and can grow no faster than international trading volume.
So very little value to own without good dividends. Cutters in shipping and energy rightly lose half their value in a hurry.

2008 Nov 25 11:47 AM

[Alan Young:]

If a business is losing cash flow due to market conditions beyond its control, I'd rather it maintain its long-term viability by putting its remaining cash to working more efficiently, rather than cannibalize itself to make stockholders happy for another quarter. If you're only interested in short-term trades, then your response makes sense--but don't blame the business model; that's strictly market-timing.

2008 Nov 25 02:48 PM

[Dividend Gr...:]

Aalan,

My reviews of companies cutting or eliminating dividends suggest that more bad news are ahead for stockholders in those that provide negative dividend news. I do write how much the stock has increased or decreased in a given week, but that's because I provide the dividend cuts on a weekly basis. I wish I had started tracking dividend cuts a long time ago..
In a previous post I posted a chart from Ned Davis research, showing that dividend cutters or eliminators underperform the dividend growers and initiators over the long-term. So I wouldn't expect these stocks on average to perform well over time.

On Nov 25 02:48 PM Aalan wrote:

> If a business is losing cash flow due to market conditions beyond
> its control, I'd rather it maintain its long-term viability by putting
> its remaining cash to working more efficiently, rather than cannibalize
> itself to make stockholders happy for another quarter. If you're
> only interested in short-term trades, then your response makes sense--but
> don't blame the business model; that's strictly market-timing.

2008 Nov 26 09:58 AM

[jackooo:]

I don't buy unless there is a dividend.
If you reduce or eliminate a dividend it is like a reverse stock split. Look at JDSU.

2008 Nov 26 12:10 PM

[AMP123:]

It's interesting to look at free cash flow (FCF) and payout ratios for these companies over the last three years. When FCF is declining y-o-y and the payout ratios is over 50%, It sure looks like a clear warning sign that dividends may be cut, or at least flat.

While this suggest setting screening criteria to filter for the above, further analysis is needed. It would be interesting to backtest FCF and payout over the last 10 years to determine if there really is correlation to subsequent dividend cuts.

2008 Nov 26 01:48 PM

[Gorbo:]

REIT's are different from non REIT's when it comes to paying out dividends. If there is a profit they generally must pay out most per IRS rules

2008 Nov 26 10:51 PM

[Old Trader:]

I'd have to agree with AMP123, as well as Aalan. Yield is important to me, in my retirement portfolio, but in times like this, assuming a company is well managed, it might well make sense to cut/eliminate dividends to conserve cash for future operations/expansions, etc., rather than trying to access expensive, or non-existent capital markets, or the issuance of additional shares (dilutive to existing shareholders) to secure capital that might be needed.

2008 Nov 27 03:10 AM

[PeteK:]

To choose a stock, shouldn't solely base on the dividend alone.
Future potential is the most important.

2008 Nov 29 02:15 AM

[antiquary:]

Cutting a dividend indicates the company doesn't have a firm grip on its business? Only in ordinary times. This is no cyclic downturn.

These days, selling a company because it's cutting a dividend is like breaking up with a nymphomaniac with multiple personality disorder because she's currently on a rare personality that doesn't want to sleep with you. These companies have the dividend habit. They'll be back, and reward most those who had faith in them.

Mar 02 02:58 PM

[Dividend Gr...:]

Antiquary,

So far the statistics show that breaking with a dividend stock after a cut is a smart way to preserve wealth.


On Mar 02 02:58 PM antiquary wrote:

> Cutting a dividend indicates the company doesn't have a firm grip
> on its business? Only in ordinary times. This is no cyclic downturn.
>
>
> These days, selling a company because it's cutting a dividend is
> like breaking up with a nymphomaniac with multiple personality disorder
> because she's currently on a rare personality that doesn't want to
> sleep with you. These companies have the dividend habit. They'll
> be back, and reward most those who had faith in them.

Mar 03 03:26 AM