Dividend Cuts Could Be Spreading To Commodities Companies

There were several dividend cuts last week, including a notable one from a commodities company. A report from Deutsche Bank (DB) analysts predicted dividend cuts in several mining companies, including Alcoa (AA), Southern Copper (PCU), Cliffs Natural Resources (CLF) and Companhia Vale do Rio Doce (RIO), which further depressed investor sentiment, and sent basic materials stocks lower. The negative dividend news concerning the materials sectors shouldn’t really affect overall dividend sentiment, as the dividend payments that these companies pay are typically not as consistent and smooth in terms of size of payment, due to the cyclical nature of the commodities business. With metals prices dropping significantly off of their record highs over the past few months it is no surprise that Deutsche Bank is expecting dividend cuts in the above mentioned companies.

On December 3, Freeport-McMoRan Copper & Gold Inc. (FCX) announced a reduction in its copper production and sales, capital spending and expenditures. Furthermore the company announced that it was suspending its dividends. The stock lost 9% from the day of the announcement until the end of the week.

The other three notable dividend cuts included property trusts

Ramco-Gershenson Properties Trust (RPT) announced on December 3rd a 50% dividend cut in its quarterly payment to shareholders to $0.2313/share. The stock lost only 3% by the end of the week on the negative news.

Medical Properties Trust, Inc. (MPW) announced on December 4th that its Board has approved a 25.9% reduction in its quarterly dividend from $0.27 to $0.20 per common share. The stock closed over 8% higher on the day.

Post Properties (PPS) announced on December 2nd that its Board has reduced the quarterly dividend rate on its common stock to $0.20 per share from $0.45/share. The company also announced a stock buyback program which would allow it to repurchase up to $200 million worth of its common and preferred stock until December 2010. Investors reacted positively to this news, sending the stock over 15% higher by the end of the week.

The most interesting story I am seeing evolve over the past couple of weeks is that sectors which have experienced the most in dividend cuts over the past year, are buckling conventional wisdom when it comes to dividend cuts and rally on the news. In terms of investor sentiment this could mark a significant shift from bearish to bullish expectations for many stock holders. Whether this will hold of course will remain to be seen. The best ways for dividend growth investors to exit positions which have cut or eliminated their payments is when the stocks are going higher as opposed to lower.

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Comment by Dr. Sebastian Uremadu

2008-12-21 08:45:32

As would be expected in corporate finance theories when illiquidity exists firms reduce their dividend payouts. It is a conventional wisdom that this is happening now.

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