Sunday, November 16, 2008

Is negative dividend news good for the stock price?

Last week there were several companies that cut or suspended their dividend payments. As part of my studies to uncover market inefficiencies pertaining to dividend stocks I am measuring the performance of those dividend suspenders or cutters. As part of my sample I am measuring stocks which trade at least several hundred thousand shares per day. I am also measuring the decline or advance based off the opening price for the day on which the dividend cut or suspension was announced. This would be the price at which an ordinary dividend investor could have traded stocks after learning the news.

On November 10, American Capital Strategies (ACAS) announced that it was purchasing the remaining shares of European Capital held by investor. In addition to that this business development company announced that it will not pay any dividends for the remainder of 2008. ACAS stock opened at $9.81, and then surged to $10.58, before closing at $7.87, for a loss of 19.78% off the open.

LandAmerica Financial Group, Inc. (LFG) announced on November 10th that it continued to aggressively cut costs, suspended its quarterly dividend and had paused certain capital expenditures related to its Fusion initiatives, in order to preserve capital and address the declines in revenues. The stock opened higher after this news, but sellers quickly pushed the shares down 14% from the open.

Early on November 11th, KKR Financial Holdings LLC (KFN) suspended its dividend for the third quarter of 2008 citing unprecedented level of illiquidity in the global financial markets and the Company's determination that maintaining maximum flexibility through retaining capital. Investors rushed for the exits as the stock quickly fell 9.50% from the open.

Diana Shipping (DSX) declared a Q3 dividend of $0.95 per share on November 12, but suspended future dividends to position the company for market opportunities. The company also announced a $100 million dollar buyback. Despite the fact that the company did beat its third quarter earnings consensus, the stock fell twelve percent after the news of the dividend suspension hit the wires.

Prudential Financial (PRU) cut its 2008 annual dividend by 50% on November 12. The stock defied the odds however by finishing the day one percent above the opening price in the morning.

Euroseas (ESEA), which provides ocean-going transportation services worldwide, announced on Friday that it will cut the quarterly dividend to 20 cents/share. The stock closed 2% higher from the opening price.

Freeseas (FREE), which operates as an international drybulk shipping company, cut its quarterly dividend by 62.5% from $0.20 to $0.075 per common share on Friday. As a result its shares fell over 26% after the news.

There are two opposing viewpoints regarding dividend cutters or eliminators. The first group claims that companies that cut dividends are wise enough to conserve cash during difficult market conditions. A fellow blogger Ethan Bloch claimed that if an investor owns an interest in a business that they are committed for a long while and understand the business, it may not always be gospel to ditch the stock upon the announcement of a dividend cut or suspension.

The other viewpoint is that dividend cutters are not good for shareholders as they foretell more troubles ahead. If management has no other option but to cut the dividends, which in itself is a last resort of action and the board knows about those concerns, then the administration de facto admits that they have no control over the situation. Furthermore a dividend cut tells investors that executives are bearish on the business and believe that it won't bring in enough cash for the foreseeable future. With hindsight, selling stocks in the S&P 500 after a dividend cut in 2008 would have saved you a lot of money. This could have been a result of the weak market action overall of course.

This article appeared on 180th Carnival of Personal Finance

Disclosure: I have a position in ACAS


Relevant Articles:

- MarketClub BONUS, 2 FREE MONTHS!
- When to sell your dividend stocks? Part 2
- American Capital Strategies (ACAS) Dividend Analysis
- Should you sell after a dividend cut?
- Dividend ETF’s for busy investors
- Zecco Online Discount Stock Brokerage Review

5 comments:

  1. My observation from trying to be an informed investor is that stock prices always seem to get hammered after a dividend cut.

    ReplyDelete
  2. My observation from trying to be an informed investor is that stock prices always seem to get hammered after a dividend cut.

    ReplyDelete
  3. Hey there, thanks for including my argument in your post... kick ass! However it is slightly altered. My stance isn't a one-size-fits-all, it only applies the business I own and understand.

    Furthermore, I believe our main difference boils down to time or better put, the amount of time you plan to hold specific investments.

    You are measuring performance of these stocks after a dividend suspension or cut, but your definition of performance, at least in this post, is a single day change in their stock price. What?! To me this is irrelevant.

    Now I'm not acquainted with any of the companies you've referenced and
    I don't want to get to meta here, but my investment approach involves owning businesses, businesses I understand, feel confidant in, and aren't going to discard into the waist basket due to a divined cut unless of course the economics of their business has in fact materially changed for good.

    Hope that makes sense.

    One last thought, I think it would be cool, since you talk about discovering market inefficiencies, that you post about investors and speculators overreaction to bad news i.e. dividend cuts and suspensions.

    ReplyDelete
  4. Ethan,

    The only reason why you should be in a business is not to be emotionally attached to it, but to make money off of it. When the business tells you that it can't support your lavish lifestyle by sending out dividends your way, because the CEO must get paid his million dollar salary, then why should I be the one holding on? In the 21st century stock market, the investor is the last one to get paid. If the dividend is cut, I would demand the CEO to get no pay.
    Furthermore a dividend cut tells you that the business is not doing as well as you though it was.. And your analysis might be wrong. If the business starts increasing dividends for 10 consecutive years I will start buying again. Untill then my money will be invested in something else.


    I do include the one day change from the opening price on average, as an indication that investors could be better off on average if they sell immediately after a dividend cut. My observation is that investors underreact to dividend cuts, as they believe that they would help the companies in their cash situation. When GM cut its dividends in July the stock rallied temporarily.. But it's down 70% or more since then..

    As someone who has been observing dividend cutters blaming the "economy" for their bad financial position, when in fact the business was not managed properly... and the companies ultimately went under makes me a big disbeliever of dividend cutters.

    Anyways.. I am sure that some companies that cut their dividends will do better than the pack. But on aggregate, dividend cutters or eliminators are something I tend to personally dispose of.

    To summarize, you have to " Cut your losses and let your profits run"

    ReplyDelete

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