Monday, November 10, 2008

Should you sell after a dividend cut?

In a recent report Standard and Poors predicted that dividend growth will slow in 2008 and probably become negative in 2009 as more industries are affected by the current economic slowdown. There were several dividend cuts and eliminations last week. Stocks that cut or eliminate their dividends tend to underperform the S&P 500 over time. It’s interesting to note that investors reacted differently about each occasion where a dividend cut or elimination occured.

Carnival Corp (CCL) announced on October 31 that it will suspend its dividend for 2009. The company announced that the dividend suspension would result in annualized cash savings of approximately $1.3 billion. The significant liquidity provided by the dividend suspension gives the company the flexibility to fund its 2009 capacity growth without the need to access credit markets. The stock proceeded to lose 15% of its value by the end of the week, following the announcement.

Genworth Financial (GNW) announced on November 6 that it will suspend its dividend and stock buyback. The stock lost over one third of its value at the close of the session on November 7th, compared to the opening price for the day.

The E.W. Scripps Company (SSP) suspended their dividends on November 7. The company CEO justified the decision - including headcount reductions, suspension of the dividend and other expense reductions – as one that will keep the company’s debt low and balance sheet healthy. The stock headed lower, losing 2% off the opening price for the day.

Strategic Hotels and Resorts (BEE) announced a dividend suspension on its common stock on November 5th. The stock lost over fourteen and a half percent over the next 2 trading days to close at $3.37 on November 7th.

Group 1 Automotive, Inc. (GPI) announced on November 5 that its Board has approved a 64% reduction in its quarterly dividend from $0.14 to $0.05 per common share. The stock finished lower at the day of the announcement, but quickly recovered and ended one percent higher than what it was trading for before the dividend cut.

KB Home (KBH) announced on November 5 that its Board has approved a 75% reduction in its quarterly dividend from $0.25 to $0.0625. As a result shares fell to $14.76, recording a loss of over 12.5% in just under two trading days.

CBL & Associates Properties, Inc. (CBL) announced on November 4 a 32.7% reduction in its quarterly dividend from $0.55 to $0.37 per common share. The stock was hit hard as a result of this announcement. CBL shares promptly lost over twenty three percent in three days.

DCT Industrial Trust's (DCT) Board of Directors declared 50% reduction in its quarterly distribution which was previously $0.16 on November 4. The stock didn’t lose a lot of ground as it fell about four percent in three trading days.

Typically dividend cutters or eliminators have performed worse than the stock market over the past 30 years. Furthermore, based off this information and the list of dividend cuts, it seems that dividend investors would have saved themselves from suffering further losses had they sold their stock right after the dividend cut or suspension announcement.

Full Disclosure: None

4 comments:

  1. So a company who slashes its divined is admitting times are tough; or at least their times are tough.

    On average, as you said, companies who slash or suspend their dividends underperform the S&P 500 over time, which means half do worse and HALF do better.

    If you own an interest in a business and your committed for a long while and you understand the business, it may not always be gospel to ditch the stock upon the announcement of a dividend cut or suspension.

    It may be the best choice at this or that time for the company, slashing or removing it's dividend that is, and if you understand that, maybe it's a time to buy a larger interest?

    Just a thought.

    Ethan

    ReplyDelete
  2. Ethan,

    Theoretically it is true that a dividend cut is good as it allows companies to have more flexibility with their cash flows.

    However my main objective in buying dividend stocks is to get a rising dividend income. If this does not happen, then why should I hold on to a loser and let my funds sit idle when I could re-invest my proceeds in something that increases its dividends?

    Typically US companies mainly increase or leave the dividend unchanged. (Us shareholders are spoiled in this situation). If management has no other option but to cut the dividends, which in itself is a last resort of action and management knows about those concerns, then management de facto admits that they have no control over the situation.. Furthermore they tell you that they are bearish on their business and believe that it won't bring in enough cash for the foreseeable future. Why should I hold on to such stocks?

    With hindsight, selling stocks in the S&P 500 after a dividend cut in 2008 would have saved you a lot of money.. Because this was simply an indicator that all hell will break loose pretty soon..

    If a company has had a history of raising dividends for decades, and then all of a sudden they tell me that this time it is different, i simply don't believe them.. and show my vote by selling..

    ReplyDelete
  3. I noticed that you’ve been talking about Genworth Financial’s performance recently. I work for Genworth’s public relations firm and I just wanted to make sure you saw this 11/11 statement:

    http://www.genworth.com/content/etc/medialib/genworth/us/en/pdfs.Par.68208.File.dat/Mike%20Customer%20Message.pdf

    ReplyDelete
  4. Peppercom,

    I realize these are difficult times to be in business. I appreciate the link and hope that your company survives the credit meltdown.

    Best Regards,

    DGI

    ReplyDelete

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