Dividend Cuts

Royal Dutch Shell (RDS-A and RDS-B) and Disney (DIS) are among the most prominent companies to have announced dividend cuts or suspensions due to the Covid-19 economic shutdown. Cash is king during crises such as this and dividend cuts are an effort by companies to conserve cash. Look for more dividend cuts, but think the cuts won’t be as severe as others might think because maintaining dividends is a crucial part of some companies’ missions.

Vulnerable Sectors

I believe some sectors will be more vulnerable to dividend cuts than will others. Among the more vulnerable sectors are the following:

  • Energy Sector: RDS is the biggest example, but Schlumberger (SLB) is another company to have cut its dividend by 75%. With the price of oil having tanked (no pun intended), energy sector revenues are down and energy companies are struggling with their cash flow. Yet, since RDS announced its dividend cut in late April, the other “majors” such as ExxonMobil and Chevron have not followed suit and have maintained their dividends. The price of oil has recovered somewhat from its sub-$20 days and so we will see if companies will continue to maintain their dividends. Perhaps RDS will raise its dividend if the oil price continues to stabilize. Even the “midstream” pipeline companies and such, which have traditionally been stable dividend plays for investors, are potentially at risk if economic activity and therefore energy consumption remains at risk for a longer period of time.
  • Entertainment Sector: With entertainment venues shut down, revenues are really suffering, and dividends from this sector are extremely vulnerable. DIS has plenty of cash and could have paid its dividend but there was so much uncertainty at the time that they chose instead not to pay their 1st half dividend. With their parks worldwide starting to reopen with the new normal of human interaction, but with people starving to have something fun to do, look for Disney to pay its 2nd half dividend later this year. Theater owner AMC Entertainment slashed its dividend by 85% in the 1st quarter 2020 – look for its possible elimination in the 2nd quarter as its venues are closed.
  • REITs: I am looking particularly at office and potentially mortgage REITs. Will workers flock back to traditional offices once the Covid scare is mitigated? Or will companies follow the lead of some its Silicon Valley brethren (such as Twitter) and allow workers to continue to work from home even post-Covid? I don’t see the demand for office space growing in the near future. With mortgage REITs, rates are so low that top-line revenues will likely be diminished, which could put stress on the dividend going forward. Annaly Capital Management (NLY), a company I have followed for years, has maintained its dividend while its stock price has fallen by about 40%, pre-Covid to now.

More Stable Sectors

On the good news side, traditional dividend plays such as the telecoms (AT&T and Verizon) have taken hits in their stock price (T more so than VZ) but have maintained their dividends. I would expect their dividend rates to be maintained. Also, the mega-caps that pay dividends, particularly AAPL and MSFT, will likely continue to do so.

IMO

As the picture brightens somewhat and the economy continues to open up, the dividend story, which looked really bad a month ago, may turn out to be not as bad as feared. Dividend cuts are not treated lightly and investors tend to punish companies that cut dividends. We are right in the middle of the 2nd quarter and financial results will be bad when they are announced in a couple of months or so. More dividend cuts could be announced, but if companies are looking at a brighter future when the time comes for the decision about dividends, perhaps companies will bite the bullet and maintain their current dividends and hope that the brighter future pans out. What to do if you are a dividend investor? Diversify! Don’t have all of your eggs in one basket, either in one company or one sector that might be more vulnerable than another. Alternatively, look at potential sources other than dividends to generate current income within your portfolio. I run a strategy that does so – send me a note to find out more!

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