Company reduces dividend, gets over sold...

[Cabin111]

Here me out on this one...I've done this over the years with OK results. This may sound like babbling, it's a little hard to explain.

You have a fairly solid company that needs to reduce their dividend. This is because they will soon need to go into the bond market and refinance some maturing bonds. This company MAKES MONEY!! It is holding market share during a recession.

With the announcement the stock will drop. Many times it will get oversold. Usually the reason is because value owners and pensioners look to the income flow of the dividend. Mutual funds and pension funds want to be out of the company...Not having it on their books (to look stupid) come report times.

I know the board of directors (and management) have looked long and hard at this decision (since stock options would come into play).

Instead of giving a stock for an example, I'll just choose an average utility with an average dividend payment. Just grabbed this off the internet.

"Historically, dividend investors tend to be attracted to utility stocks due to their high yields. For dividend comparison purposes, utility stocks have a 3.96% average dividend yield, while utility stocks in the S&P 500 have a 3.7% average yield."

This is the pattern for me. Announcement of stock reduction. Make sure it is not because of anything other than normal business activity...No big class actions coming (that they could lose). Two or three days later wait for a further drop, then buy some of the stock. I will usually set a much lower price that the bid/ask, since it is being unloaded in volume. As soon as I have a fill, I will do a covered call on the next highest price which may involve a leap.

Example...XYZ trades at $50-55. range for a year. They announce the reduction of the dividend. The stock drops to $46. I'll put in my bid at $44.90. Once I see a fill, I'll do a leap (covered call) for a year out...At the $45.

I'm in a good state of mind, you can shoot holes in this concept.

Also, I've had the stock drop much further...Examples GM or GE. I've learned over the years if the stock drops more than 20%, I will buy back my option, then just get rid of the stock...Humbly swallow my pride (with my tail between my legs) and walk away.

 

[SoyUnGanador]

I agree with this. Awhile back I asked for sites that have stocks with recent dividend cuts. But at or shortly after the cut. At that point the bad new is out, they've likely cut it enough so it does not have to be cut again, and shit is poised to get better.

 

[Cabin111]

I agree with this. Awhile back I asked for sites that have stocks with recent dividend cuts. But at or shortly after the cut. At that point the bad new is out, they've likely cut it enough so it does not have to be cut again, and shit is poised to get better.

Thank you!! So maybe I'm not nuts...Or, we are two nuts on the same path.

PS That was dividend reduction...Not stock reduction.

 

[newwurldmn]

I agree with this. Awhile back I asked for sites that have stocks with recent dividend cuts. But at or shortly after the cut. At that point the bad new is out, they've likely cut it enough so it does not have to be cut again, and shit is poised to get better.

in America when companies cut their div they are saying that their prospects are impaired for a very long time. It’s a last resort move.

I haven’t backtested it but I would suspect you would have to have a holding period of many years before you see improvement.

 

[Cabin111]

in America when companies cut their div they are saying that their prospects are impaired for a very long time. It’s a last resort move.

I haven’t backtested it but I would suspect you would have to have a holding period of many years before you see improvement.

I agree somewhat. I am willing to invest for the long term with a quality stock...Hence the leap. If it was a dividend elimination (not reduction), it would send out major warning signs like you have mentioned.

 

[SoyUnGanador]

in America when companies cut their div they are saying that their prospects are impaired for a very long time. It’s a last resort move.

I haven’t backtested it but I would suspect you would have to have a holding period of many years before you see improvement.

See, I think you are wrong. Not that their prospects might be impaired necessarily, but that the dividend cut IS THE POINT WHEN ALL THE BAD NEWS IS OUT. Their prospects would have been impaired with or without the dividend cuts. The dividend cut shores up their finances, all the bad news is out, that is an ideal buying point in my theory. I have not back tested either, but when I was looking at this awhile back and I was looking at various stocks that cut dividends compared to SPY performance they were looking darned good...

 

[nitrene]

It could work but it ultimately depends on the company's balance sheet -- so its a case by case scenario.

I mean years ago I remember JCPenny getting rid of their dividend and it was just a short because their segment of retail had gone down and their balance sheet was terrible. It went from like $50 to $1 in a couple of years.

Boeing got rid of their dividend during the pandemic but they survived and thrived, although it did take a huge Airline bailout by the Trump admin.

 

[SoyUnGanador]

It could work but it ultimately depends on the company's balance sheet -- so its a case by case scenario.

I mean years ago I remember JCPenny getting rid of their dividend and it was just a short because their segment of retail had gone down and their balance sheet was terrible. It went from like $50 to $1 in a couple of years.

Boeing got rid of their dividend during the pandemic but they survived and thrived, although it did take a huge Airline bailout by the Trump admin.

Yes dividend cuts because company is completely going to shit definitely bad call. But economy is faltering a little bit, the [financial services] sector has reduced profitability, the companies in that industry are trying to keep their dividends at the same level without cutting, but then one cuts its dividends. But that one, rather than the others that haven't cut yet.

 

[newwurldmn]

I agree somewhat. I am willing to invest for the long term with a quality stock...Hence the leap. If it was a dividend elimination (not reduction), it would send out major warning signs like you have mentioned.

reductions are warning signs too.

 

[newwurldmn]

See, I think you are wrong. Not that their prospects might be impaired necessarily, but that the dividend cut IS THE POINT WHEN ALL THE BAD NEWS IS OUT. Their prospects would have been impaired with or without the dividend cuts. The dividend cut shores up their finances, all the bad news is out, that is an ideal buying point in my theory. I have not back tested either, but when I was looking at this awhile back and I was looking at various stocks that cut dividends compared to SPY performance they were looking darned good...

In America, dividend payouts are really low for most companies. And companies that pay dividends do it to court specific types of shareholders. If they are cutting the dividend it means they are burned all their margin of safety on their earnings and now have to sacrifice their core shareholders. It shores up their finances the way cutting back on alcohol improves the financial situation for an unemployed person. It helps but he's got bigger problems than a few beers.