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United Continental Airlines Inc. (UAL) suffered the worst public relations crisis in decades following a series of incidents involving airline passengers. The airline’s problems began in March when it refused to allow two passengers wearing yoga pants to board a plane, and then reached a new level in April when a paying passenger was violently removed from an overbooked flight to make room for the airline’s employees to fly.
The company’s stock price responded by falling from $71.50 per share to a low of around $68.50 in the aftermath of the violent passenger removal. Since then, the stock has continued to trend lower and remains below $70 per share after briefly making a comeback earlier this week. The drop could become a buying opportunity based on past examples of public relations disasters that have tended to resolve themselves over time.
In this article, we will look at how dividend stocks responded to and recovered from public relations disasters that threatened their businesses in the past and how these examples translate to the United Airlines crisis unfolding right now.
There have been several major public relations disasters over the years that have impacted dividend-paying public companies. In most cases, these companies eventually managed to recover and rebuild their brand’s reputation, while the financial repercussions have depended largely on the direct impact of product recalls or clean-up efforts.
BP’s Oil Spill
BP plc’s (BP ) Deepwater Horizon oil spill is perhaps the most recent public relations disaster aside from United Airlines. On April 20, 2010, high-pressure or methane gas rose into the drilling rig and caused an explosion that killed 11 workers and led to the largest accidental marine oil spill in the history of the petroleum industry. The company tried to downplay the extent and its role in the disaster, but ended up paying a record $18.7 billion in fines.
The company’s stock fell from a pre-disaster high of around $60.00 per share to a post-crisis low of about $27.00 per share – a sharp 55% decline over the course of just weeks – as investors worried about the potential costs of the cleanup and subsequent lawsuits. The company also suspended its 84 cent (1.71%) dividend until February of 2011 when it reinstituted its dividend at just 42 cents (0.91%) to conserve cash. The company now pays a 60 cent dividend that represents a 7.03% yield, while its stock price has recovered to $34.00 per share – still well below its highs before the oil spill.
Also see: BP’s dividend history and payout statistics.
Toyota Motors Recall
Toyota Motor Corp.’s (TM ) recall of 8.8 million vehicles due to accelerator defects was another recent public relations disaster. In November 2009, the company issued its first recall to correct a possible incursion of a front driver’s side floor mat into the foot pedal well. A second recall began after crashes were shown to have originated from the mechanical striking of the accelerator pedals, which caused unintended acceleration.
The company’s stock price reacted negatively to the recalls by falling from a high of around $90.00 on January 21, 2010 (just before the second major recall) to a low of around $72.00 – a sizable 20% drop in price – in the subsequent weeks as investors speculated about the impact. However, the recall only had a modest impact on the company’s overall financial results and didn’t have a material impact on its dividend payouts. The company’s stock price has since risen to $104.00 per share, while its dividend reached $1.77 per share – or a 3.62% yield.
United Airlines’ Incident
United Airlines’ public relations crisis will likely have a greater impact on its long-term brand rather than its immediate financial performance. Unlike BP or Toyota, the company won’t likely face any direct financial consequences from the public relations crisis since there are no material lawsuits or payouts that need to be made. The only financial impact could come from a reduction in bookings that won’t be seen until the next couple of quarterly reports are filed.
While the reaction to the incident has been harsh on social media, the airline industry already had a poor reputation for customer service. Many customers are price sensitive rather than loyal to a specific brand, while those that are loyal to a brand are unlikely to abandon the airline given their existing rewards. These factors could make it difficult for the airline to face much of a material backlash from these isolated incidents.
Most public relations disasters have been relatively benign in the grand scheme of things except for disasters that involve large financial settlements.
Here’s a look at some other PR disasters and their impact on stock price:
|Name||Ticker||Price Recovery Time||Effect on Dividend Payouts||Recovery Time for Dividend to Reach Pre-Disaster Levels|
|PepsiCo Inc. – Syringe Crisis||(PEP )||Immediate||No Change||N/A|
|Yum Brands Inc. – Taco Bell Meat Lawsuit||(YUM )||7 Days||No Change||N/A|
|BP plc – Oil Spill||(BP )||Hasn't Recovered*||Dividend Suspended*||9 Months|
|Toyota Motor Corp. – Recall||(TM )||~ 1 Year||No Change||N/A|
|Target Corp. – Hacking Crisis||(TGT )||Immediate||Dividend Continued & Increased||N/A|
|* Impact may be due to oil prices in addition to the impact of the oil spill.|
These major public relations crises had a limited impact on each company’s financial performance, while BP was the only company that experienced negative consequences in terms of its dividend payout (and that may have been due to oil prices).
United Airlines has experienced a significant backlash from consumers after a pair of incidents involving passengers on its airline. Despite the public outcry, history suggests that there will be limited repercussions in terms of revenue, profitability and dividend payments. The only time companies have experienced issues with dividends have been when significant fines were imposed, but the long-term impact will be seen in upcoming quarters.
Investors can find an updated list of companies that have recently announced changes in their payout policies, along with their ex-dividend dates, in Dividend.com’s Dividend Payout Changes and Announcements tool, as well as companies that have increased their dividends for many consecutive years in their 25-Year Dividend Increasing Stocks page or 10-Year Dividend Increasing Stocks page.