Seeing a company that you own shares in cutting its dividend is a sure sign of trouble. In most cases, a dividend cut shouldn't come as a complete surprise. Dividend cuts often come when times are known to be rough. The dividend cut itself is usually a confirmation. Companies may be experiencing declining revenue or some other type of unexpected expense that forces them to make tough choices in an effort to raise cash. Cutting the dividend saves the company the cash that would otherwise be paid to shareholders.
There are a handful of companies that meet these very criteria, and have made significant cuts to their dividend within the last one to two years. Some happen to exist in industries with very challenging economic conditions, while others are simply a result of bad management decisions.
Here are three companies that have made significant cuts to their dividend recently and should be avoided for the time being.
Arch Coal (ACI)
You could pick on a number of energy companies here, especially the ones that deal with mining natural materials. My pick here is Arch Coal.
Arch primarily deals in the production of met coal in several states. Met coal prices have recently dropped to a six-year low of around $120 a ton on increased global supply. Moody's estimates that as much as half of global output is being mined at a loss. Worse, they also forecast that current low prices will likely be around for the next few years.
Arch slashed its dividend from $0.11 to $0.03 in 2012, and again to $0.01 in the first quarter of 2014 in an effort to help stave off the cash burn. Additionally, the company has decided to focus production on its lowest cost mines and shutter the higher cost ones. It's a story not unfamiliar to many natural resource producers and the end might not be in sight for a while.
Frontier Communications (NASDAQ:FTR)
The wireless, data and internet provider is a little different than Arch in that it has been lowering its dividend for the last few years, and another dividend cut may very well be on the way.
Frontier cut its dividend from $0.25 to $0.188 in 2010 and again to $0.10 in 2012. Frontier has been experiencing declining revenues for awhile now, and is expected to experience more of the same going forward (a year over year revenue decline of 3.4% in 2014, and another 1.8% decline in 2015). Investors will be attracted to the company's 7% yield, but that could be in danger going forward due to massive debt. An $8B debt and declining revenue to service it is not a good combination.
Frontier may have reason for optimism, though. Its addition of 1.5B AT&T customers could be a revenue driver, and the decision to concentrate on the company's broadband business should add focus to growing revenue in this important area. It's a good strategy, but I want to see a revenue turnaround before I buy here.
Avon Products (NYSE:AVP)
The beauty products giant's biggest problem is quite simple -- it can't find enough Avon ladies.
Representative attrition and a decision to enter unprofitable overseas markets have hit the bottom line. As a result, the dividend was cut from $0.23 to $0.06 in late 2012. Additionally, between legal fees and settlement costs, Avon has dropped almost half a billion dollars related to a bribery investigation in China.
Like the other companies on the list, Avon has a turnaround plan, but thus far it hasn't paid many dividends. The stock is down 21% year to date and down 38% in the last year. Cost-cutting strategies like the dividend cut are among the company's primary focus in getting things turned around, but investors will likely want to wait to see concrete signs of growth before jumping in.
Companies that cut their dividends are usually experiencing a tough economic environment and are saving cash in order to keep their heads above water. Those types of companies usually don't make good investments. Shorts, option traders and deep value seekers may find trading opportunities in these types of companies, but longs are going to have to be willing to ride out the company's challenges before likely seeing a profit. Regarding companies that have cut their dividends, you want to proceed with extreme caution.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.