The inevitable dividend cuts

First off, why would a company drastically cut its dividend?

A certain amount of a companies net profit can be allocated to its shareholders as a dividend, or kept within the company as retained earnings. Dividend payments are decided by the board of directors and approved by shareholders. Dividend payments can be issued as cash or as shares of the stock.

A dividend cut happens when a dividend paying company either completely stops paying out a dividend (worst case) or reduces the amount which it pays out. More than often a company cutting their dividend results in a sharp decline of the stock price, because this action is usually a sign of a company weakening financial position, which makes it less attractive to us investors.

Understanding why dividend may be drastically cut.

More than often it is bad news which causes a stock to cut its dividend or suspend it.

Cutting a dividend is normally due to factors such as weakening earnings or limited funds available to meet the dividend payment. Typically, dividends are paid out of a company’s earnings, and if earnings were to decline over time, the company either needs to increase its payout rate or access capital from other places, such as short term investments or debt to meet the past dividend levels.

Why are dividend cuts not always such bad news?

While most dividend investors see dividend cuts as a negative sign for a company’s health in some cases its not all doom.

Under the right conditions - for example, when the pricing and conditions are just right for a stock buy back; a major recession becomes the priority or a company needs to accumulate cash on hand for a big merger or acquisition.

In these cases, a dividend cut - even a drastic one - may not necessarily be a sign of trouble, or even a sign that selling the stock is your best course of action.

Now you understand why a company may cut its dividend we will move onto current examples.

The aerospace company Boeing ticker BA. Have recently announced a suspension of their dividend amid the spread of Covid-19.

There was much speculation around this stock cutting its dividend, and a dividend halt has been the subject of Wall Street speculation for weeks.

On top of the dividend suspension, BA has also extended its buyback “pause” until further notice along side the CEO Dave Calhoun and Chairman Larry Kellner are forgoing pay for the rest of 2020.

Why has BA suspended its dividend specifically?

As the 737 MAX has been grounded for more than a year following two deadly crashes inside of five months. Boeing planned to bring the plane back by mid-2020, but the virus has created an unprecedented situation for the aerospace and airline industry. With the stop of people traveling airlines are being hit hard and some have went bankrupt. With so much fear Boeing shares have dropped an unbelievable 70% year to date. Boeing once being the largest industrial company in the world, measured by market cap, Boeing is no longer the largest U.S. aerospace and defence company. Lockheed Martin (LMT) now holds that crown.

What other stocks have cut or suspended their dividend?

Boeing ticker BA.

Ford ticker F

Delta Airlines ticker DAL

Macy’s ticker M

Occidental ticker OXY

Marks & Spencers ticker MKS

JD Wetherspoons ticker JDW

Travis Perkins ticker TPK

This is a small list covering both US and UK shares, but as the fear continues, we will see this grow bigger over time. Now is the time to evaluate the stocks which you hold in your portfolio and work out if they are at risk of cutting their dividend.


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