Recessions are hard on even the strongest of companies. Dividend Champions are companies that have survived at least the past two recessions. I wanted to understand why companies that historically had been Dividend Champions lost that status and came to realize that this situation is quite rare. In part 1 I look at three companies that cut their dividends after a history of increases.
Dividend Champions are companies that have raised their annual dividend each of the past 25 years. While this is not a guarantee that they will retain that status indefinitely, there is a degree of confidence that most will for a very long time.
I decided to find companies that fell off the list over the past dozen years and investigate the reasons why it happened. I was not concerned with companies that left their dividend unchanged but wanted to focus on those that cut it. As it turned out, actual dividend cuts for these companies are a rare occurrence.
76 Companies Dropped Since 2008
Since 1 January 2008, 76 companies have been removed from the Dividend Champions list. My interest lies with those that cut their dividend, a more severe decision than merely stopping its growth for a year. It is true that such a company no longer fits the description of a Dividend Champion, but my interest is along the lines of a company paying out less than they have over many years.
Of the 76 companies in the list, 14 had a year where they kept their dividend unchanged. Most of these companies resumed dividend increases and some of them are now Dividend Challengers.
23 of the companies on the list were acquired, so they were not included in the study.
The list contains 23 companies that are in the Financial Services or Real Estate sectors. We all know what happened in 2008 and it takes no stretch of the imagination to understand that the financial impact on these companies forced a dividend cut, so they are not included in this study. As with the group that left their dividend unchanged for a year, most resumed their dividend increases, and most of those are now Dividend Challengers.
Several others were in the group of 76 companies because the company split into parts or spun off a major component, thus forcing a dividend cut. As this situation is not a negative to the investor, for the purpose of this examination I chose not to include them.
The final list is of nine Dividend Champions. Understanding why these companies decided to cut their longstanding dividend should give us an idea of what to look for going into the future.
Calvin B. Taylor Bankshares Inc. - When Is a Dividend Cut Not a Dividend Cut?
When I was probably about six or seven years old I had a joke book. I can still remember the first joke in the book – When is a boy not a boy? Answer: When he’s abed. The word “abed” was not yet in my vocabulary so I did not understand the joke, but that did not stop me from telling it over and over.
But the question of when is a dividend cut, not a dividend cut, is legitimate and sent me down a rabbit hole while researching Calvin B. Taylor Bankshares Inc. They had been listed as the most recent (March 2020) of the Dividend Champions to have cut their dividend after 30 consecutive years of growth.
If you have never heard of the company then you are certainly in the majority. By far the smallest within the final group, they are a holding company offering banking products, which include deposit services, checking, savings, online banking, mobile banking, and loans to corporate and individual clients.
They currently have a market capitalization of about $80 million, which is small to the extent that the stock is only available through the OTC Markets Group, previously known as the Pink Sheets. This is an exchange where one does not have to file with the SEC to be listed (although most do), and is primarily for very small and thinly traded companies.
An initial examination showed me that their dividend had dropped from $0.31 to $0.26 but their financials gave me no clues as to why the decision had been made. Indeed, there was little information about this small company to the point that I had difficulty even finding their website.
I had a chance to speak with Dean Lewis, Chief Financial Officer of the bank and he explained to me that they had not cut their dividend. In years past they had distributed yearly dividends but as a company with a very small trading volume, it had become a problem. The price would rise in anticipation of the dividend and fall following the distribution, a scheme commonly used by those employing a dividend capture strategy.
They switched to quarterly dividends to ameliorate this situation and in 2019 offered three $0.25 dividends, followed by a $0.31 dividend at the end of the year. This blueprint is the expectation for 2020, which is why the $0.26 dividend appears as a cut. The plan is for three $0.26 quarterly dividends, followed by a larger final dividend to make the annual dividend larger than the previous year, thus preserving annual dividend growth.
It depends upon how one decides to define exactly what constitutes a Dividend Champion and what does not. In this particular case, as the dividend cut will probably not result in an annual dividend cut, I am keeping the company on my list of Dividend Champions, at least until the final dividend of the year.
Diebold Nixdorf Inc. – Incremental Make-Believe
Each year I ask for participation from visitors to the website to determine the dividend companies where people either participate in the dividend reinvestment programs or purchases. When I look at the listing created in 2000 I see that Diebold Nixdorf (Diebold at the time) was one of the more popular companies. I remember it being talked about quite often on The Motley Fool message boards in glowing terms.
Diebold Nixdorf (DBD) is engaged in providing software and hardware services for financial and retail industries. The company is our first study of those that seemingly begrudgingly increase their dividend. In 2011 they offered a dividend of $0.28 per share. Since 2008 they had increased their dividend by one cent per year, a dividend growth rate of a little over 1%. In 2012 they moved it up one-half cent to $0.285. 2013 saw a dividend increase of one-quarter cent, to $0.2875, where it remained for another three years before being slashed to $0.10, where it remains to this day.
It is not as if one could not have seen this coming. Dividend growth is one of the elements that we look at when considering a company, and when dividends are increased by fractions of a cent then this action appears as perfunctory – like a child cleaning their room, they do the bare minimum. And like when the mother looks under the bed to find all of the toys hastily stashed, a make-believe dividend increase will eventually have a time of reckoning.
With Diebold having lost about 90% of its value over the past five years and negative earnings, the $0.10 will could eventually go away.
Pitney Bowes Inc. – Another Incremental Case
Pitney Bowes (PBI) is a global technology company that offers products to assist consumers in marketing to their customers. At least since 2000, Pitney Bowes Inc. has been another case of a company offering a very small dividend increase. The quarterly dividends in 2000 were $0.285, which were moved up to $0.29 in 2001, about a 1% increase (though fortunate shareholders were treated to a one-time special dividend of $0.972 that year), and the half-cent increments continued each year until 2006. 2008 saw a two-cent increase in dividend but 2010 returned to the half-cent increases.
In January 2013 Pitney Bowes increased its dividend to $0.375 per share, representing a 13% yield. It is difficult to maintain a dividend yield in this stratospheric area and the following quarter it was cut in half, where it remained until 2019 when it was cut to $0.05.
Pitney Bowes had seen a stock high of $63.93 in April 1999. It dropped significantly then rebounded to $48 in April 2007, whereupon it lost 95% of its value. Those looking for high dividends will note the current 8.7% yield but with the stock hovering in the low $2 range the risk of the dividend coming to an end is real.
This is another case where one could have seen the dividend cut from a mile away. Falling stock prices can yield unsustainable dividend yields that must somehow be dealt with. The company needs to choose between using their earnings to fix what is wrong with the company or please their shareholders with dividends. When the payout ratio reaches a point where it inhibits the company’s ability to grow then the responsible move is probably to divert the cash to rescuing the company.
CenturyLink Inc. – Frozen in Time
It seems forever ago when I was a CenturyLink (CTL) shareholder. That a couple of decades ago when stocks had massive swings regularly and CenturyLink was no exception. CenturyLink offers businesses a full menu of communications services, providing colocation and data center services, data transportation, and end-user phone and Internet service. During the beginnings of the Internet, the company's price rose to $47.37 in December 1999 then fell to $24.50 in April 2000. Its ups and downs were like other technology companies of the time, crazily dancing to seemingly random points.
I sound like a broken record when I mention their dividend growth measured in terms of portions of a cent. CenturyLink’s 2000 quarterly dividend was $0.0475 and was raised by one-quarter of one cent in 2001 to $0.05. This minuscule dividend rise continued into 2008 when the dividend was increased by more than a factor of ten.
CenturyLink had decided to change from a low dividend company to one that distributed essentially all of its free cash flow. The June 2008 dividend of $0.0675 was increased to $0.70 in September, a huge move. This dividend remained constant throughout 2009, rising to $0.725 in 2010, where it remained until 2013, when it cut its dividend by 25% after announcing a revised capital allocation strategy.
From 2008 to 2013 CenturyLink had increased its debt load 600%, as its revenue growth could only be attained through acquisitions. CenturyLink had acquired Qwest, which doubled its size. They also issued a large number of shares at the time of the acquisition, placing a burden on the dividend’s affordability. Although there was enough free cash flow to pay the dividend that did not leave much room for an increase.
The market punished CenturyLink by dropping the share price by over 20%, but as the dividend had been stuck in place for three years, this should not have been a shock. Declining revenues as customers started to shift toward cellular phones brought cash flow under pressure. Debt and the dividend were two of the biggest cash expenses, so it made sense to slash one to pay the other.
To be Continued
The next article will examine five more Dividend Champions that cut their dividend and will see how this knowledge can be applied to today's group.
