Many investors dread dividend cuts as a sign of a company’s flagging financials. It follows that recent reports indicating that 2015’s count of dividend cuts exceeded that of 2008’s could spook shareholders.
On the forefront of the dividend cutting trend is, not surprisingly, the oil industry. Crushed by a steep decline in prices, oil producers have struggled, and continue to struggle, with dwindling earnings. Reducing dividend payouts to shareholders is one way of trying to neutralize the impact to earnings. Chesapeake Oil, for instance, cut dividends by -66.7% to $0.0875 per share as of September 2015.Transocean’s dividends plunged by -80% by mid-2015.
Some companies, like ConocoPhillips, that have been increasing dividends over several years are now induced to pull the plug. ConocoPhillips’ dividend per share is expected to decline by from 74 cents to 25 cents. Other commodities firms are feeling the pinch too. Peabody Energy, the world’s largest private coal company, cut its dividends to $0.025 per share in 2015 from the $0.085 level it had maintained for the preceding four years. Rio Tinto is another firm that had long adhered to a progressive dividend strategy in the past, but now seems to have succumbed to the increasing pressures of commodity rout. There are also speculations about its rival BHP cutting dividends as the possibility of a credit rating downgrade intensifies.
Seeing resource-sensitive companies scramble to cut dividends, along with the knowledge that dividend cuts surpassed the levels of the last recession, could inject pessimism in markets. However, what should also be considered here are the potential optimizing strategies firms are using to combat global headwinds, dividend decreases being one of them. The other constructive view is that there is more positive than negative; while the count of dividend cuts went up by +33.6%, the number of dividend increases rose by +64.8% from 2008.
Dividend Cuts and Hikes Rise from Recession Levels
Although energy and commodities are facing challenging times, they are also actively strategizing to mitigate risks. Through dividend cuts, they seek to improve their ability to pay off debts and to stock up on enough cash to support solvency during highly uncertain times. The most stable players may even see the opportunity to invest in growth opportunities, once global turmoil subsides and demand starts to pick up, allowing their liquidity optimization strategies of today bolster their value in the future.