Is A Dividend Cut The End Of The World? Stock Price Recovery And The Contrarian View, Part IV

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Includes: ARCH, ASB, AVP, AVY, AZN, BAC, BBT, BWP, CEO, CHEV, CHL, CMA, DX, EOC, FITB, FNB, FULT, FUN, GCI, GE, GTY, HBOS, HCBK, INFY, IRET, JNJ, KEY, KIM, KOF, LM, LNC, LSBK, LZB, MAS, MCD, NE, NPBC, NPK, OFC, ONB, PBI, PEBO, PFE, RF, SNP, SNV, SPY, STBA, STI, STT, SUSQ, SVU, T, TEF, UDR, USB, VLY, VMC, WAFD, WFC, WRE, WSBC
by: Accelerating Dividends
Summary

Does a company’s stock price ever recover and reach new all-time highs? Only 8 companies (13.6%) in the sample had their stock price recover and reach their previous all-time highs.

On average, it took the 8 companies 47 months for their stock price to recover to their previous all-time high.

There were only 3 companies whose stock price recovered to their previous all-time highs and who also returned their dividend payouts to previous levels before they were cut.

Cost averaging down or initiating a new position in companies who have cut their dividend (the contrarian view) may prove to be very profitable.

INTRODUCTION

This is part IV of a series analyzing data obtained from companies that cut their dividend. My intention is to provide more information regarding trends and tendencies so that investors can make more informed decisions should they experience this kind of event within their portfolio. This series is seeking to answer these questions in particular and more while the data is being explored (or as suggestions or questions come up from the comments section). The questions are:

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 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?

The other articles in this series have covered the following topics:

· Part I: Methodology, sample characteristics and average dividend cut percentage

· Part II: Trends and patterns in the stock price prior to and after a dividend cut announcement

· Part III: Impact on income, subsequent dividend cuts and recovery to previous payout levels

In part III the data showed that only about 10% of the companies in the sample had returned their dividends to previous payouts. Although the majority of the companies in the sample had raised their dividends, the rate has been slow or a dividend freeze followed. Since these company's dividends have not returned the same amount of income as they had previously, this article will analyze whether the stock price of the companies in the sample return to recent highs or makes new all-time highs.

The companies that make up the sample are found in the table below.

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.

(NYSE: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

(NASDAQ:ONB)

Dynex Capital Inc.

(NYSE:DX)

Peoples Bancorp OH

(NASDAQ:PEBO)

Investors Real Estate Trust

(NYSE: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

(NYSE:ASB)

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)

Question 5: Does a company's stock price ever recover and reach new all-time highs?

Before beginning this analysis, I want to explain a few things. The following price chart will help illustrate the points that I will be addressing.

ACI Price Action Chart

All-time high

The all-time high is the highest price the company has traded for at any time while its stock has traded publicly on an exchange. This information is used for comparison since many stocks along with the market have reached new all-time highs. The question is whether these companies that have cut their dividends have "gone along for the ride."

High prior to decline

This point has been chosen for a few reasons.

1. This is not the all-time high. This provides a price where investors may have a position in the company.

2. This is the start prior to the decline in the stock price leading up the declaration date of the dividend cut. This may have been a point where investors began to question the safety of the dividend, fundamentals in the company changed or some other news. Looking at ACI, the stock was on a nice run, having doubled in a little over two years until it suddenly dropped and subsequently cut its dividend.

3. Investors tend to "buy high and sell low" and several companies in the sample had a nice run similar to ACI or had been consolidating as if waiting to break out prior to the decline. This may be a time in which investors actually initiated a position.

4. Finally, it provides a better hope for a recovered share price than the all-time high.

Declaration date

This is the date when the company announced the dividend cut. It also refers to the closing price of the stock on this date.

Current price

The current price is actually based on December 5th, 2014 data which corresponds with when I completed my data collection.

Now, it is time to answer question 5. From the sample, only 8 companies (13.6%) in the sample had their stock price recover and reach their previous all-time highs. These companies are LZB, CHEV, HBOS, LSBK, USB, WFC, FUN and WSO. Furthermore, only 18 companies (30.5%) stock prices (which include the 8 companies that reached their all-time highs) have recovered and reached their high prior to decline. These companies include SNP, KOF, ONB, STT, WSBC, AZN, PFE, IRET, UDR and CHL. Finally, the majority of the companies in the sample have seen their stock prices recover from the declaration date closing price. However, there are 5 companies (8.5%) which have never recovered from any of the points of reference discussed. These companies are BAC, RF, SNV, NPK and EOC. Some may be saying why ACI is not on the list given the price action chart above. ACI did briefing trade above the declaration date closing price thus it qualified as a company that recovered. These 5 companies may have come close, but the stock price never traded above the declaration date closing price.

The following scatterplot presents the difference between the all-time high and current stock prices of the companies in the sample by percentage. Even though the stock prices of 8 companies have recovered to their previous all-time highs, they did not remain there very long. Some have slipped below that level while only USB has remained above its previous all-time high. However, as the scatterplot shows, the majority of companies are more than 20% down from their all-time high. In fact, the average difference between the all-time and the current price is -42.49%. That remains quite the difference to make up.

Scatterplot of all-time high to current price

The average difference between the high prior to decline and current price is -24.80%. The scatterplot below presents in the difference between these two price points. In this case, there are 13 companies whose current stock price remains above the high prior to decline price point.

Scatterplot of high prior to decline to current price

An important follow up question may be how long it took for these companies to recover? On average, it took the 8 companies 47 months for their stock price to recover to their previous all-time high. It took 25 months on average for the stock price of the 18 companies to recover to their high prior to decline price point. Finally, it took approximately 1 month for the stock price of the majority of the companies in the sample to trade above their declaration date closing price.

The following table presents the time and percentage of the price targets we have discussed for all companies separated by sector and CCC classification.

Sector

Current price recovered from previous ATH† (months)

ATH to current price (%)

Current price recovered from previous HPD‡ (months)

HPD to current price (%)

Current price recovered from declaration date closing price (months)

Basic Materials

-

-64.99%

1

-54.14%

2

Consumer Goods

70

-49.39%

13

-24.53%

1

Financial

44

-37.97%

31

-23.61%

2

Healthcare

-

-24.48%

24

24.99%

1

Industrial Goods

-

-49.90%

-

-42.16%

1

REIT

-

-44.39%

47

-25.35%

1

Services

42

-41.07%

19

-10.56%

1

Technology

-

-41.28%

4

-15.71%

1

Utility

-

-24.17%

-

-23.46%

-

Champion

70

-43.18%

41

-29.60%

1

Contender

50

-38.69%

34

-19.87%

1

Challenger

27

-44.65%

5

-19.81%

2

† ATH = All-time high; ‡ HPD = High prior to decline

From the second column it becomes evident that the stock prices of the companies that recovered to their previous all-time high are found in the consumer goods, financial and services sector. The stock prices from companies found within the industrial goods and utility sectors have yet to recover to their previous all-time high or their high prior to decline price points (as shown in the second and fourth column). The companies found within the basic materials sector (-64.99%) are, on average, the furthest away from recovering to their previous all-time high stock prices compared to the other sectors (third column). The companies found in the healthcare (-24.48%) and utility (-24.17%) sectors are, on average, the closest to recovering to their previous all-time highs (third column). Furthermore, the healthcare sector is the only sector that shows an average that is above their previous high before decline stock prices (24.99%).

The stock prices of companies classified as challengers on average recovered to their previous all-time highs the quickest (27 months) compared to champions (70 months) and contenders (50 months). The three companies classified as challengers that have recovered to their previous all-time highs are CHEV, HBOS and LSBK. There were two champions (LZB and USB) and three contenders (WFC, FUN and WSO) who recovered to their previous all-time highs. On the other hand, the average stock price difference between the all-time high and current price for challengers exceeds that of champions and contenders (-44.65% vs. -43.18% and -38.69% respectively). A similar observation is drawn in the analysis comparing the high prior to decline price point and the current price however the average between the two is nearly equal that of the contenders (-19.81% vs. -19.87% respectively).

On a side note, one may be asking, did any of the 8 companies whose stock prices recovered to previous all-time highs also return their dividend to previous payouts? The answer is yes; there were 3 companies. The companies were LSBK (which is questionable for reasons discussed in Part III of this series), WFC and FUN.

After considering all this information, I began to question whether it was prudent to perhaps cost average down or initiate an entirely new position in a company that has cut their dividend.

Bonus Question 6: Should you be a contrarian and buy dividend stocks after they cut their dividends?

We have already seen that most of the companies in the sample have not returned their dividends to previous payout levels, however, most companies have increased their dividends at least once (n = 38, 64.41%) and at least half the sample (n = 30, 50.85%) have increased their dividends more than once. My thought here is perhaps not so much in obtaining the income from dividends but rather if the stock price recovers high enough to perhaps offset the loss of dividend income via capital gains or to simply make some profits via capital gains while collecting a smaller amount of dividend income along the way by initiating a new position.

The initial reaction by many if not most dividend growth investors when a dividend cut occurs is to sell. Whether many investors do or don't is unknown to me. However, using the contrarian point of view shows that the average stock price appreciation between the declaration date and the current price is 73.12% in an average time of 52 months. Using an average rather than a CAGR, we find that over the 52 months (or about 4.5 years) the stock prices of the companies appreciated 16.25% annually. The following scatterplot presents the distribution of that appreciation by company.

Scatterplot declaration date to current price

Yes ladies and gentleman there are stock prices that have doubled, tripled, even became four and seven baggers. However, there are many stock prices from the companies in the sample that have declined below the declaration date closing price overtime. Here are some of the highlights that I observed:

· LZB (223.75%), LM (194.36%), LNC (200.26%), STT (192.97%), USB (310.63%), MAS (271.79%), GCI (767.73%), and FUN (396.53%) were the companies whose stock prices appreciated the most. The stock prices of these companies from the declaration date to the current price took 71 months or nearly 6 years on average to appreciate as they did. Several of these companies such as GCI continued to depreciate after the declaration date, however, if you had bought GCI when the dust settled at its low of $2.00, your investment would have returned over 1500%. In the case of MAS and FUN, from low to current price, the price of these stocks would have doubled the return calculated from the declaration date closing price.

· A total of 14 companies (ACI, CEO, NE, SNP, KOF, AVP, BAC, RF, SNV, VLY, NPK, SVU, TEF and EOC) have current prices that are below the declaration date closing price. These 14 companies represent nearly a quarter of the sample (23.73%).

· Based on the average stock price of all the companies in the sample that have appreciated, the average return is 107.53%. The average stock price of all the companies in the sample that have depreciated is -37.45%.

· A total of 16 companies in the sample (27.11%) had a stock price return of over 100% from the declaration date closing price.

The following table presents the stock price average between the declaration date to the current price and the amount of time in months by sector and CCC classification.

Sector

Declaration date to current price (%)

Time from declaration date to current price (months)

Basic Materials

-33.90%

21

Consumer Goods

61.95%

42

Financial

76.78%

65

Healthcare

91.47%

42

Industrial Goods

96.63%

58

REIT

38.05%

42

Services

292.40%

54

Technology

12.94%

29

Utility

-19.98%

31

Champion

109.67%

66

Contender

78.60%

52

Challenger

-5.08%

25

The services sector had the biggest gain of 292.40% on average and is the only sector to have a triple digit stock price appreciation. The healthcare and industrial goods sectors did provide a nice return (91.47% and 96.63% respectively) by nearly doubling whereas the basic materials (-33.90%) and utility (-19.98%) sectors have depreciated from the declaration date closing price. Although this may be unfair for these sectors due to low frequencies in the sample as well as time to recover as the companies in these sectors cut their dividend much later than the majority of the other companies in the sample. The companies classified as challengers were the worst-performing of the group (-5.08%) and were eclipsed by the contenders (78.60%) and champions (109.67%).

SUMMARY AND CONCLUSION

The analysis of these companies has reinforced the findings in general that companies that cut their dividends lag behind the market and their dividend growth counterparts who continued to raise their dividends without interruption. Companies like Johnson & Johnson (NYSE:JNJ) or McDonald's (NYSE:MCD), which have continued to increase their dividends, have rode the bull market and reached new all-time highs. In the case of MCD, headwinds, market challenges and scandals have not stopped the company from reaching all-time highs. Although most of the companies in the sample have not reached new all-time highs, some have appreciated nonetheless. It could very well be the reason that dividend cutting companies lag the overall market may be due to investor confidence requiring reinforcement that another dividend cut will not occur, that the dividend cut has helped the company perform a turn around and improved the company's footing. All of these things take time possibly in the form of years and not months as the 8 companies that did reach previous all-time highs took 47 months or just shy of 4 years on average.

The companies classified as challengers were the worst performers in stock appreciation compared to champions and contenders. This finding reiterates the time factor discussed above as challengers had less time to recover compared to champions and contenders. This was mostly due to the fact that challengers contained all the companies from the basic material and utility sectors which have underperformed overall. Therefore, this reiterates another point that the CCC classification may not influence a stock's performance or recovery following a dividend cut.

Although the companies in the services sector had nearly tripled their stock prices on average, a closer examination reveals that this sector was led by GCI and FUN, which had large gains. SVU was one of the stocks whose current price is below the declaration date closing price. WSO has only gained 41.62% in the span of 22 months, which is very impressive and trails the S&P 500's (NYSEARCA:SPY) combined 2013 and 2014 returns by only a few percentage points. GCI, FUN, WSO among others show that certain stocks can outperform benchmarks and dividend growth stocks that have not cut their dividends. Future research into these companies could help identify why they among others were able to rebound following the dividend cut. Such research is currently outside the scope of this article.

One question that warrants some consideration is whether an investor should sell the stock whose price has completely recovered but whose dividend has not. This would include companies like LZB, CHEV, HBOS, USB and WSO. In the case of HBOS and CHEV, these companies have only raised their dividend once. USB and LZB have raised their dividends respectively 4 and 3 times since the cut, however their dividends respectively remain -42.35% and -33.33% below their payouts prior to the dividend cut. It would be prudent for an investor to sell and reinvest their funds into another company as the likelihood of the dividend being reinstated to previous payouts is doubtful. This assumes that an investor is capable of patiently waiting for the stock price to rise to the point where they have recuperated their principal. In most cases, it has taken years. Depending on when a position was initiated and whether an investor chooses to cost average down, it may even be more prudent to sell on the news, reinvest in another income generating stock like AT&T (NYSE:T) in order to recover some of the lost funds.

On that particular note, cost averaging down may help in the majority of cases to reduce the average loss that an investor incurred due to the selling following a dividend cut announcement. This may reduce the timeframe needed for the stock price to recover to the average price of the investor, particularly if an investor waits for the "dust to settle" as there has generally been a continued decline following the dividend cut announcement. Patience is a key theme that needs to play out during these times. If an investor is planning to sell the stock once the stock price has recovered, they may have to do it quickly particularly if they bought the stock near the all-time highs. The stock price of companies that recovered to those levels, apart from one, did not hold long and it fact in most cases, reached the same price to the penny before retreating, almost as if the previous all-time high acted as a resistance point.

The concluding piece to this series (Part V) will pull all of the findings from this series together but will also analyze the total returns over the past several years (still deciding on a timeframe) of the companies in the sample to the companies found in Mike Nadel's Nifty Fifty Series.

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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.