Introduction: The idea for this article came up as a result of a question from a new Seeking Alpha member. The question seems straight forward but there is an underlying bigger question that could be of great significance to all dividend investors, a large part of Seeking Alpha's user community. And for all of us to reach the bottom of it, we request all the readers, especially ones who have spent decades in the market, to chip in with their own answers to that "bigger question".
The Question: The most rewarding part of writing on Seeking Alpha is the interaction with readers and other authors. It feels even better when you receive a personal note from one of your readers, most of whom happen to be new investors. Below is the note we received from user "Gosho1991".
The Answer: The answer to that question could be multi-fold. Is General Electric (NYSE:GE) a good buy ? Yes, No, and Maybe. It depends on what type of investor you are. It depends on how long you plan to hold it. However, we mostly write about dividends/dividend growth. And since "Gosho1991" is talking about a retirement portfolio - we assume that the real question is "Is GE A Good Dividend/Dividend Growth stock for A Retirement Portfolio ?."
Now, the answer to that question again is not easy. Jack Welch definitely created magic during his years at GE and it was the most valuable company in the world at various stages in the 1990s and early 2000s. The glory days passed and along with the rest of the market, GE suffered downturn and had to cut its dividend in 2009 from 31 cents a share to 10 cents a share. So the bigger underlying question is, should investors buy back stocks that have a history of slashing their dividends but also were considered a dividend champion once? And this is not just about GE. There are many more well known stocks in this category like the big banks Bank of America (NYSE:BAC).
Possible Reasons To Buy Dividend Cutters Again:
- Subsequent Dividend Increase: GE has been increasing dividends again since 2010, going from 10 cents a share to 17 cents a share. GE capital's recent announcement about paying dividends to its parent GE is a good sign. So, do you believe this makes a good enough reason to buy GE back as a dividend growth stock ? How many years should the company increase its dividends before you would feel safe to buy it again ?
- Cash Buildup: Companies need not reinstate their dividends right away after the business turns around and could continue building cash. They could instead use it for bettering their plants or other things critical to run/enhance the business. Of course, there is always a chance that the company blows up the cash on di-worsifications and other needless activities. But cash build up is more positive than negative.
- Change In Management: A company that cuts its dividend is usually in bad spot. It could be company specific issues or something that affects an entire sector, like the banks in 2009. Obviously the company has to turn its business around before it can generate cash or pay more dividends. Classic signs of turnaround include a change in management or a company refocusing its attention. Though it might seem like hindsight bias, Apple (NASDAQ:AAPL) comes to mind as an example, though not strictly as a dividend payer.
- Refocusing Attention And Learning From Mistakes: Netflix (NASDAQ:NFLX) might be quoted as an example of a company realizing its mistake and changing directions. Though Netflix is in no way out of its troubles yet, CEO Reed Hastings admitting his mistakes openly made investors take one more look at the stock. Those interested in Netflix may want to read this as well. Is this enough reason to buy a dividend stock in a similar situation ?
- Once Bitten, Twice Shy: Or Should dividend growth investors remain cautious and even forever stay out of companies that have slashed dividends earlier ?
Conclusion (Or rather a continuation): So, what would make you, as a dividend or dividend growth investor get back into a stock that slashed its dividends earlier other than the reasons given above? Please voice your opinions below in the comments sections so the new investors can learn the trick as well.
Disclosure: I am long AAPL.