When it comes to income investing, market participants must be prepared to deal with many adverse scenarios. A company slashing its dividend payment is one such situation.
To put it bluntly, investors hate dividend cuts and businesses fear them. Luckily, companies that go down this unsavory route can usually bounce back once underlying business fundamentals improve.
A dividend cut occurs when a publicly-listed company reduces its dividend payment or halts it entirely. Any announcement of a dividend cut is usually a sign that the company’s financial position is weakening, which usually results in a sharp decline in its share price. While dividend cuts aren’t always a bad thing, companies that implement them often become less attractive to income-seeking investors.
As one might expect, dividend cuts are more common during economic recessions. This was certainly the case following the dot-com bubble and the 2008 financial crisis, which impacted the dividend yield of various sectors, especially those tied to finance, technology and consumer spending.
That being said, investors who have selected high-quality companies for their portfolios may want to stick with them should any one of these companies announce a dividend cut. In the following section, we will look at five companies that bounced back after slashing or freezing their dividend payments.
Are you interested in companies that have never cut their dividend? Head over to the Dividend Stock Screener to locate these companies and sort them by sector and dividend yield. For instance, you can create customised views like this and this to explore common stocks, MLPs, REITs and ADRs that have grown their annualized dividends for the past 25 and 10 years, respectively.
Successful Dividend Bounce Back Stories
1. Royal Caribbean Cruises (RCL )
Miami-based cruise line Royal Caribbean Cruises is a favorite among vacationers looking to travel the sea all year round. The company was forced to cut its dividend payout about six years ago in the wake of the financial crisis and subsequent recession. The dividend cut resulted in a sharp downturn in the company’s share price.
Over time, Royal Caribbean Cruises has rebounded sharply, with dividend yields rising steadily since 2012. The company is enjoying a strong upsurge in demand, especially from the baby boomer generation, thanks to a brisk consumer-led recovery in the United States. This has helped Royal Caribbean boost revenues while keeping costs under control. The resurgence in dividend payouts reflects the company’s continued commitment to rewarding shareholders.
2. BHP (BHP )
The global commodity downturn of 2015-16 weighed heavily on BHP, the Anglo-American mining, metals and petroleum company. This led BHP to slash dividends in 2016 for the first time in 15 years, leading to a sharp downturn in its share price.
Fast forward to today, BHP is on positive footing once again thanks to rebounding commodity prices and firmer global demand, particularly from China. The return to higher profitability allowed the company to boost its dividend in 2017; it now boasts a yield that is much higher than the basic materials average. The return of profitability for the major commodity producers suggests investors are well positioned to reap higher payouts in the future.
3. Total SA (TOT )
Total SA is among the world’s biggest oil supermajors. As such, it was disproportionately impacted by the oil price collapse, which led to a sharp decline in profitability. Technically, Total did not cut its dividend, but instead used a scrip dividend program to maintain its payouts. A similar strategy was employed at other oil and gas giants struggling to pay out dividends amid falling oil prices. In the case of Total, the company offered a discount for its shares under the scrip program. However, that didn’t prevent share prices from tumbling as the oil market bottomed.
The company cut its discount in 2016 as oil rebounded from its bear market lows. By the end of 2017, Total had completely removed the discount on its scrip dividend after oil prices rose above $60 per barrel. This was the price point the company needed to boost earnings and raise its dividend payout, which it did toward the end of 2017. Currently, the stock yields more than 5%, which is more than double the basic materials average.
Some stocks have a payout ratio of zero. To explore why this is the case, refer to the following article.
4. Wells Fargo (WFC )
Wells Fargo slashed its dividend 85% during the height of the financial crisis, as banks with once-solid balance sheets found themselves struggling just to stay afloat. The collapse in yield was also accompanied by a sharp downturn in WFC stock, which was not unlike the broader financial sector. Although Wells Fargo endured the crisis better than many of its rivals, it still had to cut costs drastically to improve its operating results. Cost-cutting measures combined with a rebounding economy helped WFC raise its dividend in later years.
As of now, Wells Fargo is a dividend grower for six years running, reflecting a broad upturn in the banking sector. Financials continue to lead the second-longest bull market in U.S. history, putting Wells Fargo on track for even stronger earnings. The company is particularly strong in the mortgage department, which is benefiting from the upsurge in housing demand.
5. Exelon Corporation (EXC )
Exelon slashed its dividend in 2013, as falling prices weighed on the U.S. power giant’s ability to remain profitable. As one might expect, this led to a downturn in share prices that would continue for roughly three years until dividend raises were finally announced.
Exelon slashed its dividend following a period of higher M&A activity that was intended to strengthen the company’s utility operations. The plan would eventually pay off, leading to higher profitability that would allow the company to raise dividends in 2016. Greater sustainability of its energy fleet and zero emission credit programs in states like Illinois and New York also helped bolster the company’s financial position. Exelon has since raised its dividend in back-to-back years and recently announced a new dividend policy targeting 5% annual growth through 2020.
Exelon’s profit margins are expected to grow in the near term as utilities continue to rebound. The company is also expected to be a prime benefactor of President Trump’s tax reform due to the presence of high deferred tax liabilities (DTLs).
What creates more value for investors: dividend payouts or share repurchases? Find out here.
The Bottom Line
Dividend cuts are rarely popular in the world of income investing. However, by evaluating a company’s business model and market positioning, investors can determine whether dividends are likely to rise again in the future. Evaluating the firm’s evolving dividend policy and forward guidance can also help in that regard. Equally important is keeping track of the broader economy and/or key sectors that can influence the company’s profitability in the future.
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