Tuesday, November 25, 2008

Markets keep under reacting to dividend cuts

As part of my long term dividend strategy, I tend to buy and hold a portfolio of several dividend growth stocks. If a company keeps increasing their dividends or at least maintains it, I would keep holding the stock. If the company however decided to cut its payment for whatever reason, I lose confidence in the business model and immediately try to sell my position.

Some fellow bloggers do not agree with me on the issue of selling right after a dividend cuts. They believe that the market is efficient, and that negative dividend news is already priced into the stock when the cut is announced. Selling right after a dividend cut is a losing proposition since you are selling low and buying high.

There were several stocks that cut or suspended their dividend payments over the past week. Their performance after the dividend cuts reinforces my belief that companies that cut their dividends for whatever reasons admit that they do not have a firm grip on their business. As a long term dividend investor I want to buy stocks in companies which have the strong determination to overcome any cyclical downturns.

KeyCorp (KEY) announced on November 20 that it cut its dividend for the second time in 2008 to $0.0625/share. The stock lost over one fifth of its value at the close of the session on November 21st, compared to the opening price for the day. That’s also during a large one day surge for the markets.

The New York Times (NYT) announced on November 20 that it cut its dividend by 73.8% to $0.06/share. The stock lost over one seven percent of its value at the close of the session on November 21st, compared to the opening price for the day.

Whitney Holding Corporation (WTNY) declared a 35% reduction of its dividend to $.11 per share on November 19. The stock was slightly changed off the open and managed to increase by over three percent by the end of the week.

Eagle Materials Inc (EXP) announced on November 18 that it cut its dividend in half to $0.10/share. The stock lost 8% of its value at the close of the session on November 19th, compared to the opening price for the day.

The Board of Directors of Royal Caribbean Cruises Ltd. (RCL), decided to discontinue the company's common stock dividend, which is a move to enhance the company’s liquidity during this period of heightened economic and financial market volatility. This was one week after competitor Carnival Cruise also suspended their dividend payments. The stock proceeded to lose 30% of its value by the end of the week, following the announcement.

Navios Maritime Holdings (NM) announced on November 17 that it cut its dividend from 0.09 to $0.06/share. The stock lost around one third of its value by the end of the week, following the announcement.

Liberty Property Trust (LRY) announced Novwember 17 that its Board has approved a 23.4% reduction in its quarterly dividend from $0.62 to $0.475 per common share. The stock proceeded to lose over 29% by the end of the week.

AMB Property Corporation (AMB) suspended its Q408 dividend on November 17 as the company projects that it has already met its 2008 dividend distribution requirement. Together, these actions are expected to improve the company's cash position on a go-forward basis. These dividend changes will allow the company to retain $53 million of cash in Q408 and an additional $98 million over the course of 2009. Furthermore the board of directors announced that they expect to pay out $1.12/share in 2009 compared to the previous annual dividend rate of $2.08/share. The stock gained 15% off the open on the day of the announcement but further market weakness brought the loss for shareholders to over 13% for the week.

The average performance of all dividend cutters in the first day of the announcement was 9% loss on average, as measured from the opening price for the day. This is the third week in a row where dividend cutters get punished severely by the markets. It would be interesting to see whether performance of dividend cutters improves when the markets stabilize.

Relevant Articles:

- Which Bank will be next? Follow the dividend cuts
- Is negative dividend news good for the stock price
- Should you sell after a dividend cut?
- Worst Performing dividend stocks so far in 2008


  1. DGI: I am with you. I have watched stock after stock spiral down afet cutting its dividend. Here are the 5 I sold this year after a dividend cut:

    SFI Sold: $2.32 Now: $1.19
    ACAS Sold: $6.50 Now: $4.09
    BAC Sold: $28.51 Now: $14.80
    FR Sold: $10.22 Now: $7.56
    STI Sold: $36.43 Now: $29.63

    When they cut their dividend, they no longer met my requirements as an income investment.

    Best Wishes,

  2. When market sentiment is downwards like it has been for over a year, it is difficult for stocks to make gains and stocks with bad news usually take it on the chin.

  3. D4L,

    In some situations the dividend cut was the last thing that management did before signing the bankruptcy papers..

    Double our money,

    I agree with you that during bear markets negative news are not good. The problem is that during bull markets and expansionary economic conditions, if a company cuts or eliminates its dividends, then it shows that the business model is broken..


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