When companies reduce the dividends they pay investors, or stop paying them altogether, it can mean different things.
Sometimes it’s a result of lower earnings or a shortage of available cash. Other times, a company is uncertain about the future, and wants to keep cash on hand to protect it against unforeseen risks or seize unexpected opportunities. And sometimes, it’s because the company’s leadership thinks they can offer shareholders more value by investing the cash currently earmarked for dividends back into the business itself.
A Look At How Dividends Work
The reason that a company will offer a dividend in the first place is to reward shareholders. In some cases, companies pay dividends only to preferred stock shareholders, or pay a higher rate to certain classes of shareholders than others.
Most companies offer the regular cash payouts because management believes that paying a dividend is a better use of that capital than any strategic growth opportunities the company would otherwise invest in.
Companies that offer dividends are usually established businesses in mature industries, such as healthcare or utilities. They typically pay out their dividends on a regular schedule, annually, semi-annually, or even monthly.
Investors often rely on dividends, either as part of their investing strategy, or as a source of income. Dividend-paying stocks are especially popular among retirees, who use the income to help cover living expenses. Companies suspending dividends run the risk of alienating a sizable portion of their shareholders.
It’s important for investors to understand why a company in their portfolio has cut its dividend, and to use that information to determine whether that stock still makes sense for their broader investing strategy or whether it might be time to sell the stock. Sometimes when a company cuts its dividend, its stock price will also fall.
Recommended: How Do Dividends Work? A Complete Overview
Examples of Dividend Cuts
Recent history has provided many examples of companies that reduced, suspended or eliminated their dividends.
Meredith Corp. – Dividend Suspension
In April of 2020, roughly a month into the Covid-19 lockdowns, Meredith Corp, the publisher of magazines like People, Real Simple, and Better Homes & Gardens, suspended its dividend payments. The move came just over two months after it had announced a dividend hike.
The company eliminated its dividend amid widespread reductions in expenditures, including salary cuts after it had seen significant advertising cancellations and delays as Covid-19 lockdowns took effect. In the three months leading up to the dividend cut, its stock had dropped by 40.3%.
While the stock has staged a rally since hitting a low of $11 in October of 2020, it has not yet reinstated its dividend, as it focuses on paying down its debts.
Antero Midstream – Dividend Reduction
In February of 2021, Antero Midstream reduced its dividend by 27%. The company, which builds and operates pipelines, storage facilities and other infrastructure for natural gas, and water handling and treatment, cut the dividend in order to grow.
By cutting its annual dividend from $1.23 a share to just 90 cents, Antero Midstream was able to free up an estimated $65 million to invest in new infrastructure. Unlike some other companies who eliminate or trim their dividend because of business reversals, Antero made the move in response to promising signals about growth opportunities. Even with the cut, the company maintained a 10.3% dividend.
Estee Lauder – Dividend Suspension and Reinstatement
Roughly a month after the Covid-19 lockdowns began, Estee Lauder announced it would suspend its dividend payments. At the time, the cosmetics giant paid an annual dividend of $1.92. The company projected that as fewer people went out socially during the pandemic, they’d spend less on makeup – a projection proven correct. At the time, the company also announced other spending cuts, suspending stock buybacks and cutting executive pay by as much as 30%.
But as shops, restaurants, and bars began reopening in the first quarter of 2021, makeup sales also rose. As Estee Lauder benefited from higher sales it responded by reinstating its quarterly dividend. In May of 2021, it announced a quarterly dividend of 53 cents per share.
Healthpeak Properties – Dividend Reduction
Healthpeak Properties, a real estate investment trust (REIT) focused on properties related to life sciences, medical offices and senior housing, cut its quarterly dividend payment in February of 2021 from 37 cents per share to 30 cents per share.
At the time, Healthpeak had $1.6 billion in free cash flow. But it had concerns about the future, given the potential of recent Covid-19 related mortalities to drive down demand for senior housing. Its net income in 2020, at $413.6 million, was already much lower than the $787 million it had made in dividend payouts in 2020. The dividend reduction freed up an estimated $150 million in cash flow for Healthpeak, which the company intended to use to transition its holdings away from senior housing.
National CineMedia – Dividend Reduction
During the pandemic, people stopped going to the movies. That had a major impact on theater chains, but also on companies like National CineMedia, which sells pre-screening advertising at theaters across the United States.
That’s why the company cut its quarterly dividend from seven cents to five cents per quarter in early March of 2021. At the time of the cut, the company was in solid financial shape, with enough cash to cover its expenses. But even with ample cash, and with Covid-19 restrictions lifting around the country, the company trimmed its dividend amid concerns about how long it will take for theaters to return to normal.
National CineMedia’s stock price has been on a roller coaster ride since March, but as of July, it was trading roughly in the same range as it had been in early March.
The Walt Disney Company – Dividend Suspension
In May of 2020, with the pandemic lockdowns entering their second month, The Walt Disney Company announced it would suspend its dividend payments due to the impact of the coronavirus on its theme parks.
The dividend suspension occurred as the company’s earnings had plummeted due to the virus. By eliminating its semi-annual dividend, which it had kept at 88 cents a share since 2018, the company saved $1.6 billion of much-needed cash to preserve liquidity.
While Disney has not announced plans to reinstate its dividend, the company’s entry into the video-streaming business with its Disney+ service has many investors looking at the stock as less of an income investment, and more as a long-term growth play.
The Takeaway
Companies cut their dividends for many reasons, using the move as a way to preserve cash for future investments or during uncertain times. While investing in dividend stocks can be a smart way to generate income or increase returns on a portfolio, it’s important for investors to understand that dividends are not guaranteed in perpetuity and to consider changes in a company’s dividend payout as one factor in analyzing the value of that stock.
Whether you’re looking to invest in dividend stocks or in other types of investments, a great way to get started is by opening an account with the SoFi Invest® brokerage platform. SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs. It also offers an automated investing solution that invests your money for you based on your goals and risk.
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