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Don't Panic If Dividends Were Cut

The income-oriented investors usually afraid dividend cuts (see e.g. article and discussion http://seekingalpha.com/article/265439-avoiding-dividend-cuts-insights-from-the-number-crunchers?v=1308113973&source=tracking). Academic papers show that earnings of companies that cut dividends decrease in about 2 years around dividend cut announcement and then return back in about 2-3 years. Because for income-oriented (and especially dividend growth) investors it is more important that happens with dividends after the cut I conducted study based on Yahoo data. Example for STT is shown below:

The main results are presented in the table for dividend reductions and omissions (cut=100%). Notes in table: CCC means David Fish list of dividend growth companies; div means dividend.

TABLE

Symbol

Ex-dividend date before cut

Dividend before cut $

Ex-dividend date after cut

Dividend after cut $

Dividend after cut / Dividend before cut

Recovery ex-dividend date

Recovery dividend $

Recovery dividend /Dividend before cut

Recovery quarters

Recovery quarters Rounded

Notes

ACET

12/19/2007

0.1

2/20/2008

0.05

50.00%

6/12/2008

0.1

1

1.241758

1

 

ACI

11/12/1999

0.0575

3/2/2000

0.029

49.57%

6/1/2006

0.06

1.043478

25.07692

25

 

ACO

5/22/2000

0.07

8/17/2000

0.01

85.71%

2/23/2004

0.07

1

14.12088

14

after special dividend

AEO

9/20/2006

0.07533

12/19/2006

0.05

33.63%

6/28/2007

0.1

1.327492

2.098901

2

 

AIN

3/11/1998

0.09992

12/5/2001

0.05

49.96%

6/5/2006

0.1

1.000801

18.05495

18

No div in 1998-2001

BAM

4/28/2004

0.08

7/28/2004

0.06222

22.23%

5/3/2006

0.10667

1.333375

7.076923

7

 

BMI

8/30/2004

0.07

11/29/2004

0.035

50.00%

2/24/2005

0.07

1

0.956044

1

 

CHCO

3/8/2000

0.2

5/30/2000

0.08

60.00%

4/14/2003

0.2

1

11.52747

12

 

CMI

2/25/1991

0.06875

5/24/1991

0.00625

90.91%

5/29/1997

0.06875

1

24.14286

24

 

CPB

7/3/2001

0.225

10/3/2001

0.158

29.78%

10/2/2008

0.25

1.111111

28.08791

28

CCC

CRS

8/29/2002

0.165

11/5/2002

0.0415

74.85%

5/2/2008

0.18

1.090909

22.03297

22

 

CSX

5/23/2001

0.05

8/22/2001

0.01667

66.66%

8/29/2007

0.05

1

24.15385

24

 

CTWS

8/28/1998

0.19555

11/27/1998

0.14667

25.00%

5/27/1999

0.19533

0.998875

1.989011

2

 

D

8/29/2007

0.355

11/28/2007

0.198

44.23%

2/27/2008

0.395

1.112676

1

1

CCC

DOW

12/27/2000

0.29

3/28/2001

0.169

41.72%

6/27/2001

0.335

1.155172

1

1

 

DRI

4/5/2007

0.23

7/6/2007

0.18

21.74%

7/8/2009

0.25

1.086957

8.054945

8

CCC

EIX

12/27/1991

0.34

3/30/1992

0.202

40.59%

6/26/1992

0.35

1.029412

0.967033

1

first

EIX

10/3/2000

0.28

1/2/2001

0

100.00%

3/28/2007

0.29

1.035714

25.01099

25

second, no div in 2001-2003

ETR

5/11/1998

0.45

8/10/1998

0.3

33.33%

8/8/2003

0.45

1

20.04396

20

second

ETR

6/4/1985

0.445

9/4/1985

0

100.00%

11/3/1993

0.45

1.011236

32.76923

33

first, no div in 1987-1988

FLO

11/29/2000

0.01751

2/24/2001

0

100.00%

6/11/2003

0.01975

1.127927

9.197802

9

No div in 2001

GR

2/28/2002

0.275

6/6/2002

0.2

27.27%

11/29/2010

0.29

1.054545

34.04396

34

After spec div

HAS

10/30/2000

0.06

1/30/2001

0.03

50.00%

4/29/2004

0.06

1

13.02198

13

 

HCN

10/27/2006

0.64

1/29/2007

0.299

53.28%

5/2/2007

0.66

1.03125

1.021978

1

 

HNZ

12/23/2002

0.44

3/20/2003

0.27

38.64%

6/22/2010

0.45

1.022727

29.13187

29

CCC

HON

8/12/1991

0.1125

11/8/1991

0.0625

44.44%

2/15/1996

0.1125

1

17.14286

17

2 more cuts

HRB

9/6/1996

0.08

12/10/1996

0.05

37.50%

9/6/2001

0.08

1

19.02198

19

 

HRS

9/8/1999

0.12

11/17/1999

0.025

79.17%

9/4/2007

0.15

1.25

31.2967

31

after special div in 1999

IBM

11/5/1992

0.3025

2/4/1993

0.135

55.37%

5/8/2007

0.4

1.322314

57.20879

 

CCC /stock splits

JCS

6/20/2001

0.1

12/18/2002

0.04

60.00%

12/14/2006

0.1

1

16.01099

16

no div between old max and min

JPM

9/10/1990

0.22667

12/10/1990

0.08333

63.24%

4/2/1998

0.24

1.058808

29.34066

29

second drop now

LMT

11/29/1999

0.22

3/2/2000

0.11

50.00%

11/26/2003

0.22

1

14.98901

15

CCC

NEE

2/18/1994

0.31

5/23/1994

0.21

32.26%

2/25/2004

0.31

1

39.17582

39

 

NFG

12/29/1997

0.2175

3/27/1998

0.1675

22.99%

6/26/1998

0.225

1.034483

1

1

 

NHP

5/16/1988

0.295

8/15/1988

0.2

32.20%

5/11/1993

0.3

1.016949

19.01099

19

first

NHP

2/12/2003

0.46

5/14/2003

0.37

19.57%

8/18/2010

0.46

1

29.15385

29

second

NJR

12/12/2007

0.26667

3/12/2008

0.187

29.88%

6/11/2008

0.28

1.049987

1

1

 

NPK

2/23/2001

2

2/22/2002

0.92

54.00%

2/17/2006

2.12

1.06

16

16

CCC/annual

NSC

11/1/2000

0.2

1/31/2001

0.06

70.00%

1/31/2007

0.22

1.1

24.07692

24

 

NST

10/3/1989

0.2275

1/4/1990

0.19

16.48%

1/4/1995

0.2275

1

20.06593

20

CCC

NTRS

9/8/1999

0.12

12/8/1999

0.0675

43.75%

3/8/2000

0.135

1.125

1

1

 

OMC

3/6/2007

0.125

6/4/2007

0.075

40.00%

9/18/2007

0.15

1.2

1.164835

1

 

OXY

12/4/1990

0.3125

3/6/1991

0.125

60.00%

6/6/2008

0.32

1.024

69.25275

 

split in 2006

PCG

6/9/1988

0.48

9/9/1988

0.35

27.08%

3/9/1994

0.49

1.020833

22.05495

22

CCC

PLL

1/30/2002

0.17

5/1/2002

0.09

47.06%

2/4/2011

0.175

1.029412

35.17582

35

 

PSB

3/11/1998

0.34

6/12/1998

0.25

26.47%

6/12/2007

0.44

1.294118

36.12088

36

 

ROL

8/6/1998

0.02963

11/6/1998

0.00987

66.69%

2/8/2007

0.03333

1.124873

33.14286

33

CCC

SCG

6/8/1999

0.385

9/8/1999

0.275

28.57%

3/8/2005

0.39

1.012987

22.06593

22

CCC

SYBT

6/11/2003

0.07143

9/18/2003

0.0381

46.66%

6/10/2004

0.09524

1.333333

2.923077

3

 

TEF

12/24/1998

0.17095

2/11/1999

0

100.00%

5/11/2004

0.23269

1.361158

21.05495

21

CCC/no div in 1999-2003

TEG

11/28/2006

0.575

2/26/2007

0.059

89.74%

5/29/2007

0.66

1.147826

1.010989

1

 

TRV

3/29/2004

0.29

4/2/2004

0.21

27.59%

6/6/2007

0.29

1

12.74725

13

 

UNP

12/8/1997

0.215

3/9/1998

0.1

53.49%

11/27/2007

0.22

1.023256

39.01099

39

 

VHI

3/16/1993

0.05

6/16/1993

0

100.00%

3/20/1996

0.05

1

11.07692

11

No div in 1993

VZ

7/3/2000

0.385

7/6/2000

0.047

87.79%

10/5/2000

0.385

1

1

1

CCC

WEC

8/10/2000

0.195

11/10/2000

0.1

48.72%

2/10/2010

0.2

1.025641

37.13187

37

 

WMB

6/5/2002

0.2

8/21/2002

0.01

95.00%

6/8/2011

0.2

1

35.30769

35

 

WTS

3/1/2000

0.088

5/24/2000

0.06

31.82%

2/23/2006

0.09

1.022727

23.08791

23

 

The same table as gif. file:

Because many company fully recovered their dividend in relatively short period (average is less than 4.5 years) I think income-oriented investors should NOT sell their stocks at dividends cut announcement. My conclusion is based on the table data, so do not blame me as "buy-and-hold maniac" (I rather believe in buy-and-monitor approach), inaction inertia or status quo bias (let me quote Winnie-the Pooh "NEVER UNDERESTIMATE THE VALUE OF DOING NOTHING") or strong endowment effect (I know about such bias and control it). I'm looking forward for your comments and partner(s) for more rigorous research (see Dividend Heritage Project in my SA blog).

Added 14 Feb. 2014 (02-14-2014):

Based on historical data let's assume that dividend cut probability Pc is 4% (see seekingalpha.com/instablog/725729-sds-se...), DGR is 6.5% (see seekingalpha.com/instablog/725729-sds-se...) and price drop at the cut is 50% (my observations that it is usually less, but often price drifts down before the cut).

Assume that an investor bougth a firm with 10 years of DG history and Pc means that the firm might cut dividend in 15 years. Assume in the long run that price follows DG rate and yield is constant, so in 15 years the price increases in 2.415 times. So if price drops 50% after the cut, the investor will still have ~ 21% gain. Well 21% is small but positive.... Assuming 3% initial yield we can calculate that in 14 years prior to cut DG investor collected ~65% of initial price as dividends (without re-investing). So even after the cut 186% of initially spent money are in DGi pocket or CAGR is 4.22% (better than current bond yield).

Added 5 March 2014

I quasi-randomly choose cutters (mostly big companies and/or stocks I hold) and compare their return with SPY using nice web tool. The results are reproduced below.

As you can see the portfolio of DG firms which reduced dividends at some moment withing last 20 years outperformed SPY.