Dividend Cuts and Suspensions: Who's Paring Back?
The COVID-caused flood of dividend cuts and suspensions has slowed to a trickle, but some notable names have still slashed payouts of late.
Income investors may be forgiven if they're still shell shocked a year after they suffered a tsunami of dividend cuts, suspensions and cancellations the likes of which the market has rarely seen.
Around this time last year, investors could hardly keep up with the daily drumbeat of bad dividend news. Even immense blue-chips like Walt Disney (DIS), a stalwart dividend payer and component of the Dow Jones Industrial Average, were turning off the spigots that return cash to shareholders. Heck, Disney's dividend remains suspended to this day.
Happily, the flood of dividend cuts and cancellations we saw in 2020 has slowed to barely a trickle over the past three months or so. Indeed, since December, just a single company in the S&P 500 has announced a dividend decrease, suspension or cancellation.
But that doesn't mean the wider stock market has been totally kind to income investors' wallets. A look beyond the S&P 500 reveals that we're not completely safe from bad news as far as dividend cuts are concerned.
Perhaps just as important, although some companies have since reinstated their dividends after suspending them for a time, the reinstated payouts are far less than what income investors had come to expect.
To get a sense of where income investors remain at peril, we screened the Russell 3000 for key recent dividend cuts, suspensions and cancellations. Have a look at the three most notable dividend decreases of the past three months.
Share prices and other data are as of March 18, unless otherwise noted. Dividend yields are calculated by annualizing the most recent payment and dividing by the share price.
- Market value: $4.2 billion
- Action: Dividend decrease
- Annual dividend prior to change: $1.23 per share
Antero Midstream (AM, $8.53) gave investors a jolt in mid-February when it slashed its dividend 27% in order to allocate more capital to infrastructure investments.
The operator of pipelines and storage facilities for natural gas, liquid natural gas, and water handling and treatment, slashed its annual payout to 90 cents a share from $1.23 a share.
The move allows AM to boost capital expenditures by about $65 million, notes Raymond James analyst J.R. Weston, who rates the stock at Market Perform (the equivalent of Hold).
"While we've previously cautioned of the AM financial model attempting to 'thread the needle,' and the stock has persistently traded with a double digit dividend yield, we still expect the dividend cut will surprise some investors," Weston said in a note to clients.
UBS analyst Shneur Gershuni, who rates the stock at Neutral (Hold), largely agrees with Weston's take on events.
"While AM's headline dividend cut supports future near term volume growth, lowers leverage and creates a fresh cash flow entity, the optics of cutting to raise capex was not well received by investors," Gershuni writes.
Shares in Antero Midstream plunged more than 12% after the Feb. 18 disclosure, which is typical after stocks announce dividend cuts. However, it managed to reclaim the lost ground in a matter of weeks. And even after a bout of recent weakness, AM is up more than 12% for the year-to-date through March 18, beating the S&P 500 by more than 8 percentage points.
At 90 cents per share annually, AM's dividend yield based on the March 18 closing stock price comes to 10.3%.
Analysts' consensus recommendation on AM stock stands at Hold, according to data from S&P Global Market Intelligence. Their average annual earnings growth forecast stands at 3% over the next three to five years.
- Market value: $17.2 billion
- Action: Dividend decrease
- Annual dividend prior to change: $1.48 per share
The most recent quarterly dividend of 30 cents per share – down from a previous payout of 37 cents a share – will result in annual dividend savings of about $150 million. At a projected $1.20 a share annually, PEAK's dividend yield comes to 3.7% at the March 18 closing price.
Analysts applaud the REIT's efforts to transform its portfolio by selling its more than $4 billion senior housing portfolio, but note that the asset sales are also a drag on near-term earnings.
Indeed, by one measure, PEAK would appear to have ample resources backing its dividend. After all, the company spent a total of $787.1 million on dividends in 2020 – up from $720.1 million the previous year – and still had $1.6 billion in free cash flow after paying interest on debt.
However, net income in 2020 came to just $413.6 million. When the bottom line has to catch up to the dividend amid a costly repositioning of the business, PEAK's financial prudence is understandable.
Besides, analysts say that reducing exposure to senior housing facilities is a critical strategic move.
"In the wake of the sharp increase in COVID cases in late 2020 into January 2021, we lower our outlook for senior housing given weaker occupancy trends and higher operating expenses," says Mizuho Securities analyst Omotayo Okusanya, who rates PEAL at Neutral (Hold). "Transforming its portfolio to majority life sciences and medical office buildings could result in positive re-rating from the investor community."
Analysts' average recommendation on PEAK comes to Buy. They forecast the company to deliver average annual earnings growth of 3.9% over the next three to five years, according to S&P Global Market Intelligence.
- Market value: $419.1 million
- Action: Dividend decrease
- Annual dividend prior to change: 24 cents per share
National CineMedia (NCMI, $5.50) isn't a movie chain, but it has been hammered by the pandemic in just the same way. The company displays advertising to movie-goers throughout the U.S., and with cinema attendance only just starting to trickle back after a long pandemic drought, revenue has been hurting.
NCMI reduced its quarterly payout to 5 cents a share from 7 cents a share as part of its fourth-quarter earnings release in early March, but analysts say investors shouldn't be alarmed by the move.
Wedbush's Michael Pachter, who rates NCMI at Neutral, says payout reduction was "out of an abundance of caution," as the company has more than enough cash available for dividends, income tax payments, and other fees.
Furthermore, the analyst is cautiously optimistic about the course of its business as theater chains gradually normalize operations.
"We think NCM will be well-positioned within the ad delivery ecosystem once attendance rebounds, but currently low theatrical attendance severely limits NCM’s ability to sell impressions even as advertisers are ready," writes Pachter in a note to clients. "As theatres reopen and the release slate schedule becomes more clear, we view NCM's position as increasingly positive."
At 5 cents a share per quarter, or 20 cents per share annually, the yield on NCMI's dividend came to 3.6% as of its March 18 closing stock price. Analysts' consensus recommendation stands at Hold, according to S&P Global Market Intelligence.