Any pattern when dividends go bad

[Wizard]

When reading the Laird thread it struck me that I did not have any appreciation of whether there were repeated patterns from companies when the dividend became 'troubled'. Does a rapid cancellation of dividend usually lead to an earlier resumption and return to increases? Or is the dividend payment so subordinated to the underlying issues in the company that there is no pattern to observe? Is anyone aware of any research on this?

Terry.

[idpickering]

When reading the Laird thread it struck me that I did not have any appreciation of whether there were repeated patterns from companies when the dividend became 'troubled'. Does a rapid cancellation of dividend usually lead to an earlier resumption and return to increases? Or is the dividend payment so subordinated to the underlying issues in the company that there is no pattern to observe? Is anyone aware of any research on this?

Terry.

I'm not aware of any such research. However, for me, I try to make sure that the dividend cover is sufficient to ensure that any dividend is covered.

Regards,

Ian.

[toofast2live]

Yes, but that goes wrong doesn't it. You buy a share with good dividend cover (and very few have cover of 2 these days) and it quickly goes - or does it? Both Glaxo and Vodafone are looking dodgy on that one, and I think you own them, or is that someone else.

A 24 carat guide for me is a troubled company that brings on a new CEO. Frequently the first thing they do is phone up their schoolfriends at Mckinzie, launch a strategic review and ditch the dividend, blaming this on the poor sod who preceded them. This enables them to look like an eps and dps hero some 5 years later when looking for their next job.

A case study? Well let's look at what happens to Interserve over the next year. It is saying it still has horrid contractual problems and the CEO is leaving as soon as a replacement is found - probably next year. Now I know IRV is below the radar for many here but let's wait and see.

Also look for a deteriorating marketplace. BHP's woes were well advertised. And remember the uk market is not a good one for "long term" rising dividends. I believe when SPDR were launching their dividend aristocrats etf they had to relax the rules because so few companies had a 25 year record of RISING DIVIDENDS. I think they had to make it rising or static.

In addition, some companies are notoriously cyclical. House builders, commodities, some retailers and many industrials will slash and burn every decade or so. Fags, pharma and food less so. Caveat? Many thought banks were rock solid.

Oh, and another failsafe warning sign is me pressing the "buy" button.

However some real research rather than my ramblings would be welcome.

[pyad]

I'm not aware of academic research but anecdotally, and I have lengthy experience with this, most companies amongst those that qualify as HYP selections, ie. big caps, and suspend dividends will resume payment within a year or two. However the resumed payout is, initially, very likely to be considerably lower than the previous dividend prior to suspension and may take quite some time to recover to that previous level.

This is the general experience which is what you were seeking. But of course it cannot cover every case so there are exceptions where it takes far longer to resume dividends at all. One of the worst examples is RBS, originally one of the biggest of the big caps and a good yielder, which still hasn't paid out at all since the financial crisis hit them many years ago.

The propensity for dividend resumption following suspension is I believe greater for big caps than much smaller companies and is one of the reasons I advocate that HYPers stick with such shares.

No equity dividends are ever guaranteed so that HYP income is risk income and HYPers have to accept that. The defence against individual company and industry problems is diversification, one of the cornerstones of the strategy.

[DiamondEcho]

A 24 carat guide for me is a troubled company that brings on a new CEO. Frequently the first thing they do is phone up their schoolfriends at Mckinzie, launch a strategic review and ditch the dividend, blaming this on the poor sod who preceded them. This enables them to look like an eps and dps hero some 5 years later when looking for their next job.

What you describe is parallel/variant of 'kitchen sinking'.

In the version I have occasionally seen in my HYP, the company reports significantly worse results than expected. A fall-guy at board level is identified as the cause and fired. The dividend is slashed or suspended. Then the replacement for the fall-guy often takes the opportunity to kitchen-sink the accounts, getting all the bad news out ASAP, padding up 'nice' [for him] contingency accruals and so on. So even just a few months into his tenure he has very much enhanced the odds that he will be judged a success at the end of his tenure. In such board level positions it is common to be paid more in discounted-shares and long-term incentives linked to the share price, so kitchen-sinking might be considered as turbo-charging those future rewards.

IMO this is why big/fast investors immediately divest at the first sign of this kind of trouble, as it is often followed by a whole chunk of further bad news in short order, and meanwhile on top of a slashed/axed div, the share price faces 'multiple-injuries by a thousand cuts'.

A BBC article describes how this happened with Tesco in recent years.
http://www.bbc.co.uk/news/magazine-32412594

[Agree with Pyad re: the manner in which divs tend to get reinstated after the above happens]

[Wizard]

Thanks to everyone who has replied, much appreciated.

Terry.

[GrahamPlatt]

Your query is currently topical over on Stockopedia. They had a Webinar about it yesterday and have produced a booklet (72pp) on the subject.
http://www.stockopedia.com/content/prof ... ad-158140/

The booklet is available to 'registered users', i.e. not necessarily subscribers, so you should be able to access it http://www.stockopedia.com/books/profit-warnings/

It would be polite to register though.

[ben328]

Just to clarify, the research and webinar done by Stockopedia was about the share price performance before, during and after profit warnings. There was some very useful stuff on the average recovery of share prices, but not of dividends.

[Dod1010]

I always sell if a dividend is suspended. If it is cut (as in reduced) I might but it depends on each case. I see no pattern except that as has been implied often a reduction in the dividend is a precursor to a whole lot of other problems which I can do without, Tesco being a good example

They can often take a lot longer to be fully reinstated than we think, see HSBC in that regard, even although it never suspended its dividend it did reduce it and has not yet (8 years or so later) been fully restored. And of course RBS and Lloyds are yet to produce meaningful dividends after about 8 years suspension.

Cobham cut its dividend in all but name and it is not out of the woods yet.

There is to my mind no pattern, except that often cutting the dividend is often a warning sign of trouble ahead.

[tjh290633]

I always sell if a dividend is suspended. If it is cut (as in reduced) I might but it depends on each case. I see no pattern except that as has been implied often a reduction in the dividend is a precursor to a whole lot of other problems which I can do without, Tesco being a good example

My experience has been that it always pays to wait a while before selling out. There is usually a sharp fall, as knees jerk collectively, then there comes a bounce back, often to double the lowest price after the announcement. There are exceptions, of course.

Take AAL, for example. They announced they were not paying a dividend on 20-Feb=09 and the price fell to 1027p. I sold them a year later on 19-Feb-10 at 2450p.

Then look at DSGI, who announced no dividend on 27-Nov-08 and they fell to 14p. I sold on 06-May-09 at 43p.

RTO drastically cut their dividend paid in October 2008 and cut the following dividend, when the price fell to 44p. I sold on 19-Feb-10 at 126p.

I'll not mention the exceptions, who include Marconi, Premier Foods and Cattles.

TJH

[88V8]

Do agree with TJH that it's often good in terms of share price to wait a while before throwing the miscreants overboard.
Often. Wish I could say, Always.

Luni researched this cutters thing a few times.
Example http://boards.fool.co.uk/cutters-and-co ... sort=whole

His conclusion was that typically it takes a looooong time for the real value of a cut or pass to be restored.

He liked to avoid cutters by looking at past record.
Dodd likes to kibbitz their culture.
Some like free cash flow but given we're supposed to LTBH that seems too transitory to me.
Some like cover, and without wishing to disagree with Luni, I do too. I also try to avoid chasing yield but as far as that is concerned the spirit is willing but the flesh is weak.

V8

[Wizard]

Do agree with TJH that it's often good in terms of share price to wait a while before throwing the miscreants overboard.
Often. Wish I could say, Always.

Luni researched this cutters thing a few times.
Example http://boards.fool.co.uk/cutters-and-co ... sort=whole

His conclusion was that typically it takes a looooong time for the real value of a cut or pass to be restored.

He liked to avoid cutters by looking at past record.
Dodd likes to kibbitz their culture.
Some like free cash flow but given we're supposed to LTBH that seems too transitory to me.
Some like cover, and without wishing to disagree with Luni, I do too. I also try to avoid chasing yield but as far as that is concerned the spirit is willing but the flesh is weak.

V8

Thanks V8, very helpful I'll take a look at the link. The bold bit made me chuckle.

Terry.

[Dod1010]

I am not sure I understand the word kibbitz but it is true that I like to understand the culture of a company I am investing in; even that can go wrong because I think most people would have regarded Cobham as a good company with an excellent long term record and a culture that is responsible and with long term thinking. If the culture is right most of the rest will be right too, without our having to check on cash flows, dividend cover and the like. That is what the Directors are for.

Terry has often made his point about not selling out right away after a cut. Often I have no doubt he is right but I am impatient with problems and like to get them out of the way so I will nearly always sell a cutter immediately.

[Arborbridge]

Kibbitz, I think is American - at least this definition of it is:



: to talk to someone in a friendly and informal way

: to watch other people and make unwanted comments about what they are doing

Not sure how much that helps in this context, but there it is.

Arb.

[Lootman]

Kibbitz - to watch other people and make unwanted comments about what they are doing

That's the use I've encountered. I was a competitive chess player in my youth and there would often be people watching the key games, making comments to each other, trying to predict the moves to be played or commenting on the move just played. They'd be called kibbitzers and were said to be kibbitzing.

They kept it quiet, naturally, so it didn't usually put me off or annoy me. I think they were trying to learn from the players and that might be close to the sense that Wizard meant by it here.

Also spelled "kibitz" which is a yiddish word wit the same meaning.

[Breelander]

Also spelled "kibitz" which is a yiddish word wit the same meaning.

Many of the best 'Americanisms' have (unsurprisingly) a Yiddish origin, but this one's unusual in that it was first (apparently) adopted from the German.

1920s: Yiddish, from colloquial German, from German Kiebitz ‘interfering onlooker’ (literally ‘lapwing’).

[88V8]

Well now this an improvement over TMF. There, all this would have been deemed o/t, so I'd never have learned that all these years I not only used the word wrongly, but couldn't even spell it :}

V8