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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. SA photo reflects my soul quite well. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot... More
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  • Don't Panic If Dividends Were Cut 7 comments
    Sep 16, 2012 3:05 AM

    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:

    (click to enlarge)

    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).

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This post has 7 comments:

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  •  
    Conrad Taff demonstrated in 1954 that dividend cut provide excellent buying opportunity:
    Dividend Omission as a Buying Signal
    Conrad Taff
    The Analysts Journal Vol. 10, No. 1 (FEBRUARY 1954), pp. 67-70
    18 Jun 2012, 08:36 PM Reply Like
  •  
    Is that the academic paper that you references in your post? Is it available for viewing online?
    25 Sep 2012, 03:18 PM Reply Like
  •  
    See my comment 6/18/2012. Not sure about online but I can email to you.
    25 Sep 2012, 07:00 PM Reply Like
  •  
    How did you compile that list?

    My main objection is that because of survivorship bias, you are reaching he wrong conclusions. Why aren't companies like AIG, Washington Mutual, Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers on the list? You cannot simply cherry pick the companies that survived after dividend cuts and reach a conclusion ( I mean you can, but then you will lose money over your investment career sticking to a strategy that doesn't work)

    My experience with dividend cuts is that you get a 50/50 chance of either stock and dividend rebounding OR stock going to zero. I do not like gambling.
    16 Jan, 06:33 PM Reply Like
  •  
    I didn't picked companies but by no means my list is complete. I'm trying to handle survivorship problem within Dividends Heritage Project / http://bit.ly/Mpfq86 / .

    The study
    Dividend Omission as a Buying Signal by Conrad Taff
    The Analysts Journal Vol. 10, No. 1 (FEBRUARY 1954), pp. 67-70
    shows that the main idea was correct ~ 60 years ago. As far as I know you or your library should be a subscriber to access the paper /http://cfa.is/X9Urd1 but probably CFA Institute can send out a free copy.

    I do not like gambling also. Moreover, I do not like to be in a crowd and I think that recent popularity of dividend investing will cause strong crowd effect at any dividend cut.
    SDS
    16 Jan, 08:33 PM Reply Like
  •  
    I agree with your thesis. I kept some companies that cut their dividends, and did very well by that. Having hard and fast rules is one reason I don't count myself as a DGI investor. I buy dividend stocks that meet my criteria, and rarely sell them. When I sell, it is based on my own analysis.
    17 May, 11:44 AM Reply Like
  •  
    Hopefully DGI is not a cult and there are not strong rules to be qualified as DGi. I combine HY+DG styles and buy/sell ONLY after my own analysis. Let me quote “When a stock doesn’t pay dividends, there really isn’t a whole lot of difference between a share of stock and a baseball card.” - Mark Cuban (the owner of the National Basketball Association's Dallas Mavericks).
    SDS
    17 May, 01:34 PM Reply Like
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