What to do when companies cut dividends |
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Second, examine the company's balance sheet and quarterly earnings and cash-flow filings. They, too, can be found online or by calling your broker or investor relations. On the Internet, you can go to Yahoo's finance site, type in the company's stock symbol and click on "Key Statistics."
You also can go to the corporate filings page of the U.S. Securities and Exchange Commission Web site.
In either location, you need to assess the level of debt versus the cash on hand. If long-term debt is less than half of the capital, that's generally good, says Scott Schluederberg, who manages the diversified high-yield dividend portfolio at Hardesty Capital Management in Baltimore. If it's not, the company may be in danger.
"If a company is highly leveraged and then suffers an economic slowdown in which earnings are impacted, it's going to have to use too much of its meager earnings just keeping up with the debt payments, and that will squeeze out the dividend," he says.
Consider other possible causes for dividend reductions. The financial sector, for instance, has been unusually hard-hit by dividend pullbacks. This is largely because institutions that receive federal bailouts are required to use the extra funds for lending while reining in dividend and other payouts.
Predicting cuts before they happen
Another important consideration is whether the company has a sustainable business model or one with a strong recurring revenue stream that's relatively recession-proof. Schluederberg prefers companies that offer services that people need rather than those that require "big-ticket, discretionary purchases which most consumers can put off."
Sophisticated investors can further look into analysts' earnings expectations. Even if you can find them, opinions may vary widely.
If possible, try to get a sense of not just its present net income to determine if the company can pay its next dividend, but its anticipated future earnings, an indicator of the sustainability of dividend payments going forward, says Jonas Elmerraji, a portfolio manager in Hagerstown, Md., and editor of The Rhino Stock Report.
Not that such diligent research is always necessary. In many cases, dividend reductions can be easy to predict.
"A dividend cut usually doesn't come out of the blue but as the last in a sequence of bad news," says Walt J. Woerheide, the Frank M. Engle Distinguished Chair in Economic Security Research at the American College in Bryn Mawr, Pa. "If you read in the news that your company just reported losing $2 billion, you can expect it to trim or eliminate dividends very soon."
Woerheide urges investors to be aware of two rules of thumb about dividend distributions:
1. Dividends are almost always paid on a set schedule. If a payout is late, it's a signal of a potential problem.
2. Most dividend-paying companies increase their payouts once a year and usually at the same time each year. If that date passes and the dividend doesn't grow as much as usual, that may signal a cut.
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