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The COVID-19 crisis has caused many companies to slash their dividends and buybacks — including utilities, dividend aristocrats, and other “safe” dividend payers. While these moves shore up capital without shareholder dilution, they eliminate a key reason that many investors stick around.
Carnival Corp. (CCL) and Ford Motor Co. (F) recently suspended their dividends and share buyback programs to conserve capital during the crisis. Investors in these companies may want to carefully evaluate each situation to determine the best course of action for their portfolios.
In this article, we will take a closer look at these actions and what investors should keep in mind moving forward.
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Carnival Corp. has been hit hard by the COVID-19 crisis. After suspending operations in March 2020 in response to the crisis, the company is burning through an estimated $1 billion a month and continues to receive lawsuits from passengers aboard its voyages that were infected with SARS-CoV-2.
CCL shares fell 84% since January 1, 2020.
The company suspended its dividend and share buyback programs on March 31, 2020, to preserve liquidity. In addition, the company plans to raise up to $7 billion in capital, including $3 billion in senior secured notes, $1.75 billion in senior convertible notes, and $750 million in common stock.
On an operational level, the company is moving many of its vessels into prolonged layups that would save between $1 million and $2 million per month per ship. Prolonged, or cold, layups involve laying off all crew members except those required to perform maintenance and monitoring duties.
The Federal Reserve’s proposed secondary market corporate credit facility, designed to help U.S. companies issue bonds that would be purchased by the central bank, could further support liquidity. That said, it’s uncertain if Carnival — which is incorporated outside of the U.S. — qualifies.
Management expects that these measures will generate sufficient liquidity to remain in compliance with debt obligations over the next 12 months. With operations on hold until at least May, the company will bring in no revenue for at least part of the year — and potentially longer.
Many other cruise operators could experience similar liquidity issues. For instance, Royal Caribbean Cruises Ltd.’s (RCL) lofty 12% dividend could be at risk in the near-term.
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Ford Motor Co. suspended its dividend and temporarily halted production across North American and Europe to preserve cash and provide additional financial flexibility. In addition, the company is fully drawing down two lines of credit to raise a total of about $30 billion cash.
Ford shares have fallen 55% since January 1, 2020.
In addition, the government’s $2 trillion stimulus bill set aside $454 billion to make loans or loan guarantees for companies across all sectors — including automakers. The Federal Reserve’s bond buying program could offer further liquidity to automakers if needed.
Management has not indicated when auto manufacturing would resume, potentially costing the company billions in revenue. During the first quarter, automakers also reported sales declines of 7% to 35% year over year. To make things worse, stay-at-home orders across the country could further depress sales in Q2 and beyond.
It’s also worth noting that the company had already been struggling prior to the COVID-19 crisis as it works to implement an $11 billion restructuring plan. Moody’s cut its debt to “junk” status and S&P cut it to the lowest investment grade credit rating last year.
On the other hand, the Ford family maintains a large financial — and even larger voting — stake in the company and has historically pushed for dividends to remain in place. Many analysts believe that the dividend cut could be temporary given the strong push to reinstate it in a timely manner.
Many other automakers could struggle to meet their dividends. For instance, cutting General Motors Co.’s (GM) lofty 8% dividend could provide a much-needed way to conserve capital.
The COVID-19 crisis has impacted a wide range of companies, including many Dividend Aristocrats. Income investors should carefully analyze their portfolio to determine what dividends may be at risk and adjust their portfolios accordingly to ensure that they have sufficient income.
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