Five reasons why companies have to cut or suspend their dividend

5 reasons for companies to cut or suspend their dividend

A dividend cut rarely happens in the United States, but when it happens it's mostly a big cut with the stock price taking a beating at the same time. We look at five reasons why companies will cut or suspend their dividend.

1.    Dividend cut because of economic downturn

During periods of economic recession or uncertainty, companies may reduce their dividends to conserve cash and mitigate financial risks. For instance, in 2020, numerous companies across various sectors, including airlines like Delta Air Lines and retailers like Macy's, reduced or suspended their dividends in response to the economic impact of the COVID-19 pandemic.

2.     Dividend cut because of financial difficulties

If a company is facing financial challenges, such as declining revenues or profitability, it may choose to cut its dividend to preserve cash and improve its financial stability. For example, during the financial crisis of 2008, many financial institutions, such as Citigroup and Bank of America, cut their dividends due to substantial losses and capital constraints.

3.    Dividend cut because of capital allocation priorities

Companies may cut dividends to allocate more capital towards strategic investments, debt reduction, or internal growth opportunities. This allows them to reinvest in the business and pursue long-term value creation. One example is General Electric, which cut its dividend in 2017 as part of its restructuring efforts to focus on core businesses and reduce debt.

4.     Dividend cut because of industry-specific challenges

Companies operating in industries facing specific challenges, such as regulatory changes, technological disruptions, or shifts in consumer behavior, may opt to cut dividends to address those issues. For instance, energy companies like ExxonMobil and Chevron reduced their dividends in response to prolonged periods of low oil prices and industry headwinds. Another good example was in the years 2020 and 2021 with the covid-19 pandemic seriously hitting companies profits, resulting in massive dividend cuts, especially for Consumer Discretionary companies such as restaurants, hotel operators en clothing retailers. Also many real estate companies have been lowering or suspending the dividend since more people work from home leaving offices empty.

5.    Buybacks vs. dividends

A fifth reason to cut or cancel the dividend is a lagging stock price or management thinking that the stock price is to low. A good example is consumer goods company Jarden Corporation (merged into the current Newell Brands). Jarden management decided that the dividend should be discontinued since the stock price did not go up. Instead the company started doing massive buybacks as another way of rewarding shareholders. Especially with a stagnant stock price and growing profits this is something to consider for companies, but it does not happen very often.

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