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.

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