Is A Dividend Cut The End Of The World? Analysis Of Dividend-Cutting Companies, Part I

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Includes: ARCH, ASB, AVP, AVY, AZN, BAC, BBT, BWP, CEO, CEQP, CHEV, CHL, CMA, CVX, DX, EOC, FITB, FNB, FULT, FUN, GCI, GE, GEF.B, GTY, HBOS, HCBK, INFY, IRET, JNJ, KEY, KGC, KIM, KKPNY, KO, KOF, LM, LNC, LSBK, LZB, MAS, MCD, MI, NE, NPBC, NPK, OFC, ONB, ORRF, PBI, PEBO, PFE, PG, PGR, RF, SNP, SNV, STBA, STI, STT, SUSQ, SVU
by: Accelerating Dividends

Summary

Data was obtained on companies that have cut their dividend in order to provide more information on what to do when a company cuts its dividend.

5 questions will be answered over a series of articles regarding dividend cuts. These questions will also explore other aspects and trends.

Using the Champions, Contenders, Challengers list kept by David Fish, a sample of 59 companies will be analyzed.

The average dividend cut made by the companies in the sample was 49.52%. If the financial sector is excluded, the average dividend cut becomes 42.56%.

The average dividend cut varies by sector and CCC list classification.

INTRODUCTION

One of the most influential reasons a dividend growth investor would sell their dividend growth stocks would be due to a dividend cut (see article here). This certainly is understandable as the dividend cut has a direct impact on the amount of passive income that dividend growth investors are receiving. One of the main questions is should I hold or should I sell after the company announces a dividend cut. For some, they may be able to get out early, however for others, the stock price may have already negatively reacted (think pre or after-market hours) and some serious losses affecting either the capital gains or perhaps the principal investment may have occurred. In the article "What to do after a dividend cut: A review of the literature", one of the findings is that there is a general lack of data to help answer the question. Some portfolios performed well while holding or even after selling the company that cut their dividend. However, the companies used in those articles tended to be same which limits the scope and generalizations regarding the impact that dividend cuts have if other companies were found in the portfolio.

The purpose of this article is to provide some data and observations from that data from companies that have cut their dividend. In particular, I am looking to answer and elaborate on these particular questions:

  1. What is the average percentage that a dividend is cut?
  2. What is the stock price movement of a company after it announces a dividend cut?
  3. What is the general trend (or stock price movement) prior to a company's announcement of a dividend cut?
  4. What percentage of companies after having cut their dividend initially subsequently cut their dividend?
  5. Does a company's stock price ever recover and reach new all-time highs?

This is the first part of a series that will report on the findings from the analysis regarding the above questions and more. As I began writing, I realized that there is lots of information and one article would be too lengthy. By splitting up the articles into a series, I hope to be better able to articulate and explore the findings.

METHODOLOGY

In order to obtain a list of companies that have cut their dividend who have had a history of consecutive annual increases, I turned to the Dividend Champions, Challengers and Contenders (CCC List) spreadsheet prepared by David Fish (obtained here). I created a filter to eliminate companies that froze, suspended or companies that were removed due to mergers or spin-offs. My intention was to solely focus on companies that cut their dividend. After reviewing the list, a total of 69 companies remained. After reviewing all 69 companies, 10 were eliminated because of the following reasons:

  1. Greif Inc. (NYSE:GEF.B) and Progressive Corp. (NYSE:PGR) were eliminated due to unreliable data or in the case of Koninklijke KPN N.V. (OTCPK:KKPNY) which is currently trading OTC, there is limited data.
  2. Orrstown Financial Services (NASDAQ:ORRF) and Kinross Gold Corp. (NYSE:KGC) have actually suspended their dividends.
  3. United Community Bancorp (NASDAQ:UCBA) had frozen its dividend for an extended period of time before cutting the dividend.
  4. Wilmington Trust (NYSE:WL), Marshall & Ilsley (NYSE:MI) and Inergy IP (NYSE:CEQP) all merged or were bought by other companies.
  5. Village Super Market Inc. (NASDAQ:VLGEA) had multiple cuts over an extended history and this author did not see a 5 year continuous dividend growth streak during any period where a dividend was paid.

These deletions resulted in a sample size of 59 companies for analysis. The table below presents the list of companies in the sample.

Company

Symbol

Company

Symbol

Empresa Nacional de Electricidad SA

(NYSE:EOC)

Fifth Third Bancorp

(NASDAQ:FITB)

China Mobile Limited

(NYSE:CHL)

F.N.B. Corp.

(NYSE:FNB)

Telefonica S.A.

(NYSE:TEF)

Fulton Financial

(NASDAQ:FULT)

Infosys Technologies Ltd.

(NASDAQ:INFY)

KeyCorp

(NYSE:KEY)

Gannett Company

(NYSE:GCI)

Legg Mason

(NYSE:LM)

Supervalu Inc.

(NYSE:SVU)

Lincoln National

(NYSE:LNC)

Cedar Fair LP

(NYSE:FUN)

National Penn Bancshares

(NASDAQ:NPBC)

Watsco Inc.

(NYSE:WSO)

Old National Bancorp

(NYSE:ONB)

Dynex Capital Inc.

(NYSE:DX)

Peoples Bancorp OH

(NASDAQ:PEBO)

Investors Real Estate Trust

(NASDAQ:IRET)

Regions Financial

(NYSE:RF)

UDR Inc.

(NYSE:UDR)

Synovus Financial

(NYSE:SNV)

Washington REIT

(NYSE:WRE)

State Street Corp.

(NYSE:STT)

Getty Realty Corp.

(NYSE:GTY)

Susquehanna Bancshares

(NASDAQ:SUSQ)

Kimco Realty

(NYSE:KIM)

U.S. Bancorp

(NYSE:USB)

Corporate Office Properties Trust

(NYSE:OFC)

Washington Federal

(NASDAQ:WAFD)

National Presto Industries

(NYSE:NPK)

Hudson City Bancorp

(NASDAQ:HCBK)

General Electric

(NYSE:GE)

S&T Bancorp

(NASDAQ:STBA)

Masco Corp.

(NYSE:MAS)

SunTrust Banks Inc.

(NYSE:STI)

Vulcan Materials

(NYSE:VMC)

Valley National Bancorp

(NASDAQ:VLY)

Astrazeneca plc

(NYSE:AZN)

Wells Fargo & Co.

(NYSE:WFC)

Pfizer Inc.

(NYSE:PFE)

Wesbanco Inc.

(NASDAQ:WSBC)

Coca-Cola FEMSA S.A.B. de C.V.

(NYSE:KOF)

Cheviot Financial Corp.

(NASDAQ:CHEV)

Avery Dennison

(NYSE:AVY)

Heritage Financial Group

(NASDAQ:HBOS)

La-Z-Boy Inc.

(NYSE:LZB)

Lake Shore Bancorp Inc.

(NASDAQ:LSBK)

Pitney Bowes Inc.

(NYSE:PBI)

Associated Banc-Corp

(ASBC)

Avon Products Inc.

(NYSE:AVP)

Bank of America

(NYSE:BAC)

Arch Coal Inc.

(NYSE:ACI)

BB&T Corp.

(NYSE:BBT)

Boardwalk Pipeline Partners LP

(NYSE:BWP)

Comerica Inc.

(NYSE:CMA)

CNOOC Ltd.

(NYSE:CEO)

China Petroleum & Chemical Corp.

(NYSE:SNP)

Noble Corp.

(NYSE:NE)

 

Price history was obtained from Yahoo Finance and Freestockcharts.com. The 50-day moving average was used to understand the trend of the stock price. The dividend announcement date was used as the reference day for when a dividend cut was publicized. These dates were obtained from Nasdaq.com under the dividend history section as well as the actual company website for accuracy. In cases of uncertainty, I maintained the date that the company was removed from the CCC list.

A larger sample size is possible as there are many companies that cut their dividends. Many dividend growth investors purchase companies found on the CCC list because the companies on that list have had annual dividend increases. Companies not found on this list have not had a consistent dividend policy and are less likely to be found in a dividend growth investor's portfolio unless it was a speculative play. Thus it is more likely that the companies in this sample could have been found in a dividend growth investor's portfolio when the dividend cut occurred. Another reason to focus on companies in the CCC list is because the companies found on the list are those that could be considered less likely to cut their dividend due to their history of consecutive annual dividend increases and dividend policies.

ANALYSIS

Sample Characteristics

Here is a breakdown of the sample by sector and classification in the CCC list.

The financial sector makes up nearly 50% of the entire sample (n = 28). Also, 50.85% of the sample is made up of Champions whose dividend history was over 25 years of continuous annual dividend increases. This sample my inherently have a bias as the first CCC list was published in December 2007. This bias may be due to higher frequency of financial companies and champions. In particular I am concerned about how these variables may affect the percentage of the dividend cut. Performing a few chi-square tests shows that the variable "sector" is not a significant indicator of the percentage of a dividend cut (x2 = 87.236, df = 72, p = .107) and that the variable "CCC classification" is not a significant indicator of the percentage of a dividend cut (x2 = 27.692, df = 18, p = .074). Therefore, it can be suggested from these tests that no matter the sector or the CCC classification, it does not influence the percentage of a dividend cut.

The number of financial companies cutting their dividend does not surprise me given when the first CCC was published. What did surprise me was the proportion of champions that cut their dividend. I had hypothesized (to myself) that challengers and possibly contenders would make up the majority of companies that cut their dividend due to fewer consistent years in growing the dividend annually.

The average number of years that the sample had increased their dividend was 23 years and the median was 25 years (mode was 8 years).

The following table shows the CCC classification of the companies in the sample and the year that the companies cut their dividend. The majority of companies (n = 34, 57.63%) cut their dividends during the financial crisis (2008 [n = 11, 18.64%] and 2009 [n = 23, 38.98%]). Another large proportion of companies cut their dividends in 2012 (n = 10, 16.95%).

 

2008

2009

2010

2011

2012

2013

2014

Champion

10

16

1

1

1

1

0

Contender

1

7

0

3

2

1

0

Challenger

0

0

0

2

7

3

3

TOTAL

11

23

1

6

10

5

3

QUESTION 1: What is the average percentage that a dividend is cut?

The average dividend cut made by the companies in the sample was 49.52% while the median was 50.00% reinforcing that an investor could expect a company's dividend cut to be around this amount.

The following graph shows the percentage in categories that a dividend was cut by the companies in the sample. As the graph illustrates, the majority of companies in the sample (n = 12, 20.34%) cut their dividend by 50-60% (proper coding was conducted to ensure no overlap however for presentation purposes the categories have overlap). Of the 59 companies in the sample, 33 (55.93%) cut their dividends by 50% or more, which equates to a little over half of the sample.

The following table presents some interesting trends. The table contains the percentage range that the company cut their dividend in the column. Each sector is represented in the rows section and is sub-divided by CCC classification. If a classification is not found, there were none found in the sample. It is shown below that the financial sector lead all other sectors with dividend cuts in excess of 40% and above (n = 23, 82.14% of the sector or 38.98% of the entire sample). The companies found within the technology (n = 3) and utility (n = 1) sectors had dividend cuts that were all below 40% while the consumer goods sector (n = 5) cut within the 40-80% range. In the same table you will notice that the companies listed as champions (n = 24) had the most dividend cuts that were 50% or greater. Furthermore, companies listed as challengers were mostly found to have cut their dividends by 50% or less (n = 12, 80.00%) whereas the majority of contenders were between 30 and 60% (n = 9, 64.29%).

 

0-10%

10-20%

20-30%

30-40%

40-50%

50-60%

60-70%

70-80%

80-90%

90-100%

TOTAL

Basic Materials

Challenger

1

2

         

1

1

 

5

Consumer Goods

Champion

         

2

1

     

3

Contender

             

1

   

1

Challenger

       

1

         

1

Financial

Champion

1

1

   

1

5

3

2

5

1

19

Contender

1

 

1

 

1

2

   

1

 

6

Challenger

     

1

1

 

1

     

3

Healthcare

Champion

         

1

       

1

Challenger

1

                 

1

Industrial Goods

Champion

           

2

     

2

Contender

       

1

         

1

Challenger

   

1

             

1

REIT

Champion

1

 

1

1

           

3

Contender

     

1

1

     

1

 

3

Challenger

1

                 

1

Services

Champion

         

1

     

1

2

Contender

       

1

1

       

2

Technology

Contender

     

1

           

1

Challenger

1

   

1

           

2

Utility

Challenger

 

1

               

1

 

TOTAL

7

4

3

5

7

12

7

4

8

2

59

CCC TOTAL

Champion

2

1

1

1

1

9

6

2

5

2

30

 

Contender

1

 

1

2

4

3

 

1

2

 

14

 

Challenger

4

3

1

2

2

 

1

1

1

 

15

It is also interesting to note that the majority of champions are found in the financial sector (n = 19, 63.33%) and that 16 of those companies cut their dividend by 50% or more. This could explain the much larger proportion of champions that cut their dividend than expected as the start of the CCC list was during the financial crisis which hurt and threatened financial institutions more than others industries. The 16 champions are ASBC, BAC, BBT, CMA, FITB, FNB, FULT, KEY, LM, ONB, PEBO, RF, STT, SUSQ, USB, and WAFD. Of these 16 companies, only two did not receive government bailout money: LM and PEBO. Thus, it can be said that the conditions for these champions cutting their dividends was due to receiving government bailout money as it was a requirement in order to secure the funding. LM and PEBO may have had no other choice than to cut their dividend in order to stabilize their balance sheets and more likely cut their dividend voluntarily.

Excluding the financial sector, there are fewer companies that cut their dividend beyond 50% in the other sectors (n = 13 for >= 50% vs. n = 17 for < 50%) which could suggest that the financial crisis augmented the average dividend cut that we have observed to be around 49.52%. If we exclude the financial sector, the average dividend cut was 42.56%. This is slightly better but not a whole lot.

The average dividend cut for companies listed as challengers were 30.96% while the average for contenders was 50.11% and for champions it was 58.52%. This is the opposite direction that I had expected to observe the average dividend cut by CCC classification however it does show that challengers do not necessarily have large dividend cuts. Although a few companies (n = 3) did cut their dividend above 50%, this does not appear to be the norm. This finding could provide some added confidence to the companies in this classification.

The average dividend cut for companies by sector is presented in the table below.

Sector

Average Dividend Cut

Median Dividend Cut

Basic Materials

38.35%

17.45%

Consumer Goods

56.80%

51.22%

Financial

57.21%

54.07%

Healthcare

25.90%

25.90%

Industrial Goods

53.02%

58.36%

REIT

33.09%

30.84%

Services

64.40%

54.84%

Technology

24.35%

31.17%

Utility

17.52%

17.52%

Although it may have been expected at this point to find that financial sector had the highest dividend cut average, this was not the case. The services sector had a greater dividend cut average at 64.40%. The companies found in the services sector are FUN, GCI, SVU and WSO. The lowest were the utility (17.52%), technology (24.35%) and healthcare sectors (25.90%) although these sectors had the lowest number of companies within these groups.

SUMMARY AND CONCLUSION

The information obtained thus far has been informative. The financial sector increased the average dividend cut by ~7%. It is also apparent the financial crisis made a significant impact on the number of companies that cut their dividend as it was observed that fewer companies after the end of the financial crisis (apart from 2012 which spiked) were cutting their dividends. This could suggest that the factors for cutting dividends have more to do with global market conditions affecting the companies involved than issues found within the companies themselves. This seems broad but considering that other companies such as McDonald's (NYSE:MCD), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Procter and Gamble (NYSE:PG) and Chevron (NYSE:CVX) all continued to increase their dividends shows that the financial crisis had a smaller effect on them and no effect on their dividend policy. Given the current crude oil collapse, one wonders which companies may cut their dividends. Many oil and gas companies have already suspended their dividends (so far none are found on the CCC list) but one has to wonder if oil continues to trade at current levels or below, how long it would take the likes of CVX or Exxon (NYSE:XOM) to consider cutting their dividends. I didn't say that they would, but given the situation, it always remains a possibility.

Different sectors and different classifications on the CCC list also contribute to difference dividend cut averages. These may be important to think about when performing due diligence on a company that is being considered for a portfolio. Now, the data cannot be generalized any broader than this sample however it bears keeping in mind that some companies within the sectors and the CCC list cut their dividends deeper than others. There are numerous factors for this but it helps to reinforce the reason that many dividend growth investors seek after companies that have strong moats and products or services that people continue to use even when the economy struggles. This could be the reason that only one utility company on the CCC list has been observed to have cut their dividends since 2007.

Understanding one's company in their portfolio is important. Having more information about how and by what the company is affected by empowers an investor. This information about dividend cuts helps to provide some details that can be used to help an investor caught by such an event make informed choices and help control their emotions particularly if the initial impact of such an announcement has significantly hurt their portfolio. This information helps an investor get a sense of what they might expect.

Next, I analyze data from stock price movements in and around the time that a dividend cut is announced. Answers to questions 2 and 3 will be presented in the next article. I welcome and appreciate your comments and opinions.

Disclosure: The author is long CVX.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.