Investors who rely on dividends for income must have confidence that the stocks they own will keep making payouts through good times and bad. Unfortunately, not all stocks are able to do so, and when big dividend cuts come, they can shock the entire stock market.
During 2017, some high-profile companies made massive reductions in the dividends that they pay. Among the most famous were Teva Pharmaceutical Industries, Frontier Communications, and General Electric. Below, we'll look more closely at these three companies to see what prompted them to disappoint their dividend investors and what could be coming down the road for their business prospects.
|
Stock |
Current Dividend Yield |
Dividend Cut |
|---|---|---|
|
Teva Pharmaceutical Industries (TEVA 1.00%) |
0% |
(100%)* |
|
Frontier Communications (FTR +0.00%) |
26% |
(62%) |
|
General Electric (GE +2.04%) |
3.2% |
(50%) |
Data source: Yahoo! Finance. * Initial 75% cut followed by suspension of dividend.
Image source: Getty Images.
Can Teva heal itself?
Teva Pharmaceutical Industries went through a tough time last year. The company does a lot of business in generic drugs, and pricing on generics was extremely weak as industry practices came under fire in Washington and elsewhere. Teva in particular came under financial strain as a result of the poor industry conditions because it has taken on huge amounts of debt -- debt that it is now trying to figure out how to restructure and repay even as the company's fundamentals weaken.
Teva initially tried to contain the damage, announcing a 75% dividend cut in August that it hoped would be sufficient to help it dig its way out of its financial hole. That proved not to be enough, though, and so later in the year, Teva suspended its dividend entirely as part of a more draconian cost reduction plan. Long-term shareholders hope that Teva's business will be able to recover, yet the extent to which it has fought to integrate large acquisitions into its own operations shows that Teva still has work to do in order to turn things around entirely.
Frontier can't connect with dividend investors
Frontier knows all too well what big acquisitions can do to a company. The once-rural telecom specialist made its play to join the big leagues by buying legacy assets from multiple big carriers, spending billions in an attempt to retain and build on businesses that others had initially established. Those efforts haven't gone so well, and even after numerous attempts to keep its double-digit percentage dividend yield intact, Frontier finally made the tough decision to cut its dividend by 62% during the spring of 2017.
Since then, Frontier has continued to struggle. It had to do a reverse split of its stock, and even with the reduced payout, its shares now yield more than 25%. That points to investor skepticism that the dividend will survive very much longer. With a continued deterioration in subscriber counts and ongoing net losses, Frontier hasn't yet been able to convince shareholders that anything good will come of its efforts.
GE powers down
Finally, General Electric was the highest-profile company to cut its dividend in 2017, with a 50% reduction coming late in the year. The conglomerate's most recent moves toward focusing on the energy industry proved to be ill-timed, with persistently low oil and natural gas prices hampering its efforts to sustain profitability at levels investors wanted to see.
Bullish investors hope that General Electric's decision to cut its dividend will result in having more cash to use in order to restructure its operations and seek out smarter, higher-growth opportunities for the future. But with the company having made a fundamental mistake for the second time in a decade in picking a once-booming industry that later fell back to earth, General Electric will need to reassure its long-term investors that it hasn't permanently lost its touch in identifying smart strategies for future growth.
Be smart with dividends
The lesson you can learn by looking at these dividend reductions is that business difficulties often put pressure on companies that pay out significant dividends. Some resist dividend cuts until the bitter end, but without improvement in profits, a reduction in quarterly payouts is almost certain in the long run.
