Monday, February 23, 2009

is any dividend safe?

Dividend cuts are now becoming fast and furious as companies scramble for cash amid these difficult credit markets and plummeting asset values. The list of companies that have cut their dividend in the past few weeks would be very long. Just today, JP Morgan Chase (JPM) as well as Russel Metals (RUS) in Canada were examples of the latest dividend casualties. No dividend is safe in this market.

As far as I could see today the S&P 500 index came very close to breaching it's 10 year low of 741 points, which it sunk down to on November 20, 2008. Investors are seeing no reason to own stocks right now as earnings estimates continue to decline and economic indicators are downright ugly and getting worse. This week is setting up to be an interesting one.

Despite all of this doom, gloom, and towel throwing, I still believe a lot of dividend streams are safe and these stocks can be bought confidently for the long term. My income from investments chart is struggling to keep it's head above water, and it doesn't feel great. This was the chart that was supposed to have one direction....up.

Dividends At Risk
Any company involved in the financial industry might cut their dividend. This includes the Canadian banks and insurance firms. Also, any company who derives their earnings from commodities could cut their dividend if they have not already done so. Does this make these firms bad long term investments? Not necessarily. Should you automatically sell a company that cuts it's dividend? Absolutely not.

Safe Dividends
While no company's dividend is 100% safe, I believe there are many companies in the market who derive their earnings from stable sources and have strong balance sheets. These stocks pay dividends that should not be cut. Examples of these companies are those who sell consumer staples, most health care firms, telecommunications and utility firms, and other companies that derive earnings from relatively stable sources. A low pay out ratio, strong brands, and a history of raising dividends helps. Does this make these firms good long term investments? Not necessarily. Is keeping a dividend always a bullish sign? Absolutely not.


Sampson said...

Hey MG - any hints on which of your own portfolio holdings you think might cut vs. keep their dividends?

Having a quick gander at your portfolio, it looks like maybe 1/3 to 1/2 of the Co.'s are in the red and certainly their dividends are at the most risk.

I wonder though, if a company is still profitable or break-even, would they risk the cash in this uncertain environment?

Do you plan on making changes to your portfolio in response to dividend cuts?

MG (moneygardener) said...

Sampson, Anything financial has a risk of a cut. It really depends on the business on whether they'd risk the cash in a break-even situation.

I wouldn't change anything in response to a cut just like I wouldn't change anything in response to a raise. I look at the business as a whole and why I hold the name.

Canadian Small Cap said...

Let's not forget that if you are a long-term investor, one of your main concerns should be the long-term viability of your companies. Companies that have the courage to see the world without rose colored glasses and take actions to ensure that they will continue to thrive are definitively worth keeping in your portfolio.

We keep hearing that the current economic slowdown is the worst since the great depression. As investors, we also need to remove our own rose colored glasses.

Just listen to the Russel Metals conference call or read their press releases. Demand has fallen 40% in a very short period. Things are not fine. How would we react if 40% of personal income was to disappear in the next few months. Even though I live way below my means, I am sure that I would start cutting expenses left and right.

Great companies will adapt and survive so they can fight another day. I am not a RUS shareholder but after looking at the situation, I am impressed with management's courageous reaction.


MG (moneygardener) said...

Great points CSC. I like the analogy to personal income.

Sampson said...

I feel I'm in the same boat with respect to whether a company plans to keep, cut or eliminate its dividend. I suppose what I was trying to get at is whether companies trying not to cut their dividends will hurt their businesses.

Maybe all the pressure is just pseudo-reporting, but I'm sure there would be alot of unhappy investors if the Canadian banks started slashing dividends. I'm saving my re-analysis of companies until earnings projections are a little more reliable - but until then, I'll keep an eye out on dividend payout policies in case some Co.'s who should cut are not doing so.

Thicken My Wallet said...

You have to look at a dividend cut contextually. Why is it doing it? In RUS' case, it was partially for a sharp decline in business and partially because they would be off-side on loan covenants. RUS also had a dividend payout ratio in the 90% (last time I checked). So, to use the analogy, a 40% decline in pesonal income hurts more if you have very little discretionary income than if you had lots. It is still bad but it comes down to your margin of error shown through the payout ratio.

If a companies' earnings decline, the question becomes do we put the money in our shareholder's pockets or back in the business? If you are issuing shares to prop up balance sheets, is it exactly fair that most of that money would be redirected to dividend payments (the hard question being asked of BMO right now)?

There are some industries where a dividend cut has to be temporary simply because its peers continue to pay dividends (TRP is a good example of a company that got punished for slashing its dividend in the 1990's while its competitors maintined theirs).

In the long run, the question is whether the dividend is temporary to keep the core of the business intact or is the dividend cut a harbringer of the total collapse of the business.