Another Sign of Rough Sledding Ahead: Dividend Cuts Surpass 2008

www.bloomberg.com

By Luke Kawa

In 2015, equity investors looking for yield suffered death by 394 cuts.

Last year, the number of dividend reductions far surpassed 2008, according to Bespoke Investment Group, citing data from Standard & Poor's.

The ratcheting down of payouts to shareholders is a function of weak commodity prices, sluggish growth dampening corporate profits, and a tightening of credit conditions. This combination—and in particular the stingier lending—could exacerbate the carnage already seen this year in financial markets, further dampening economic activity.

The number of payout cuts enacted was almost 100 more than at the outset of the Great Recession—a time when the implosion of Lehman Brothers Holdings Inc. caused equity markets to plummet in the later stages of the third quarter:

"Whenever you see comparisons between any period and 2008 it grabs your attention," wrote Bespoke in a report published Friday. "Not to minimize the significance, but the peak year for dividend cuts was actually in 2009 when there were 527, and there is still a ways to go before we get there.''

Because of the stigma associated with cutting dividends, management is loath to go down that path unless the need is dire. The trend toward trimmed payouts hasn't let up so far in 2016, especially among companies under stress from soft commodity prices. In recent days, ConocoPhillips slashed its dividend by 66 percent and Potash Corp. of Saskatchewan Inc. reduced its payout by 34 percent.

Meanwhile, Statoil ASA pledged to keep its dividend intact, opting instead to add debt while continuing to cut back on capital expenditures.

Bespoke suggested that spreads in the high-yield debt market could signal whether more companies will be under pressure to cut or eliminate their dividends.

"Based on the trends of the last decade, when the credit markets are willing to lend, companies have jumped at the opportunity to borrow and increase their payouts," the analysts wrote. "The flipside is what we are seeing now, and when the credit markets start to turn off the spigot, some companies find they don’t have the cashflows to support their payouts."