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Stock Ideas Investors Daily Edge How Long Will the Honeymoon Last for Dividend Cutters?
Stock Ideas Investors Daily Edge How Long Will the Honeymoon Last for Dividend Cutters? 
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| How Long Will the Honeymoon Last for Dividend Cutters? |
| Tuesday, 31 March 2009 | ||||||||
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Something very strange is happening in the world of dividend investing... A form of backward thinking is infesting Wall Street. I first saw it in an article a couple of months ago... A bank had just cut its dividend. And the journalist was quoting a Wall Street investor who applauded the move. He said it was better for the bank to save its cash by cutting its dividend than to run the risk of running out of money and/or having to raise capital in the markets. Since then, I’ve been seeing this sentiment – “better to cut dividends than ...” – more and more. Call me old-fashioned, but I’ve always been drawn to companies that keep paying their dividends quarter after quarter without any cuts, never mind suspensions. But if, instead, I used this new form of backward thinking to pick my companies, I’d have to judge their dividend records in a completely different way. When I would see that a company has ratcheted down payments, I would have to interpret that negative action in a positive way. Like this... * The company’s management is flexible. They shrewdly didn’t take their promise to pay shareholders the same or rising dividends too seriously. * They’re playing a bad hand (the recession) extremely well. By cutting dividends, at least they’re keeping the company alive. * They’re taking advantage of a forgiving Wall Street. So why shouldn’t they strike with a dividend cut while they can get away with it? We can take this backward thinking a step further. If cutting dividends is a shrewd move that should be condoned – if not rewarded – by investors, I would also have to think that companies that raised their dividends should be punished. The new thinking would go something like this...
“Raising dividends when credit is tight and cash is king is just plain CRAZY. Why don’t companies just keep dividends as is? Shareholders wouldn’t complain. And they wouldn’t have to experience a needless drain on their cash reserves. Isn’t raising dividends just showing off? There’s no real reason to do it. And if the economy deteriorates further and sales do worse than expected, it could come back to haunt them.” As nutty as it sounds, this is exactly where Wall Street’s logic is headed. In fact, it’s already here. Raising or maintaining your dividends is now considered unduly risky. Listen to John Graham, a professor at Duke University... "Some firms, like IBM, might want to indicate that they are so strong they can continue to pay a dividend even when others are cutting dividends. That's a dangerous game... The most important thing about investing is to keep it simple. So here is the unadorned simple truth... * Dividend companies that cut dividends are having cash problems. * Dividend companies that raise dividends have plenty of cash with growing earnings that can support their dividend payments as far as the investing eye can see. The true test of Wall Street’s new backwards thinking isn’t what happens the day, week, or even month after companies cut their dividends. Dividend cutters can ride a market rally up just like non-cutters. It’s what happens in the 3-6 months down the road. The most recent rash of dividend cutters, JP Morgan, Wells Fargo, Arcelor Mittal, Dow Chemical, Alcoa, Sony, Gannet and, of course, GE, all rose last week riding the market’s latest upswing. But the jury is still out. Beginning three or four months from now, I predict most of them will be testing new lows. Invest Well, Andrew Gordon
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