Pedestrians walk past the head offices of Laurentian Bank in Montreal, April 1, 2015.CHRISTINNE MUSCHI/Reuters
When a company slashes its dividend amid gloomy operating conditions, investors are rarely delighted. Perhaps they should be: Companies that cut their payouts in 2020 are enjoying a remarkable comeback this year.
Last year was a challenging environment, when pandemic-related lockdowns weighed on economic activity and shredded corporate revenues. To save cash, many companies with previously steady payouts reduced or eliminated their dividends altogether.
Laurentian Bank lowered its quarterly dividend by 40 per cent, becoming the first large Canadian lender to do so in nearly 30 years. Suncor Energy Inc. cut its dividend by 55 per cent. RioCan Real Estate Investment Trust cut its dividend by 33 per cent. CAE Inc. suspended its dividend, and Sleep Country Canada Holdings Inc. briefly put its payout on hold.
There were many more examples.
“A dividend is a big indicator of confidence,” said Laura Lau, chief investment officer at Toronto-based Brompton Group. Cutting it meant companies had little confidence in the future.
It was not a pleasant environment for investors. Even broad dividend indexes, consisting of stocks that didn’t touch their dividends, underperformed broader benchmarks.
From mid-February through the end of 2020, a period that included the market meltdown and recovery, the S&P Dividend Aristocrats Index (which consists of stocks that have a history of raising their dividends every year) underperformed the S&P/TSX Composite Index by a substantial 12 percentage points.
But dividend stocks have made a remarkable comeback. And what’s particularly interesting is that stocks that cut their dividends are leading the way.
A 10-stock portfolio consisting of the above companies, along with Gildan Activewear Inc. , Methanex Corp. , Richelieu Hardware Ltd. , Inter Pipeline Ltd. and New Flyer Industries Inc. – all well-established companies with shares in the S&P/TSX Composite Index – is up 21.1 per cent in 2021.
This performance is about 5.5 percentage points better than the benchmark and 3.2 percentage points better than the Aristocrats Index (none of these performance figures include dividends).
Over the past 52 weeks, the differences are even more striking: The 10-stock portfolio of dividend cutters is up 56 per cent, which is about 30 percentage points better than the benchmark and 21 percentage points better than the Aristocrats.
If dividend cuts marked a particularly bleak time for the market last year, this year’s market activity is defined to some extent by a recovering global economy and the rollout of vaccines – raising investor optimism and, in some cases, restoring business confidence.
Suncor is benefiting from stronger crude oil prices: The company reported operating earnings of $746-million in the first quarter, up from a loss of $421-million in the first quarter of 2020.
Sleep Country fully reinstated its quarterly dividend in November after sales and profits rebounded. Methanex raised its quarterly payout to 12.5 US cents per share, payable on Sept. 30, up from 3.75 US cents per share previously (although still well below its recent high of 36 US cents per share).
Richelieu Hardware restored its quarterly dividend in July, 2020, and has since raised its payout and issued a special dividend to make up for the missed payment in 2020.
And Inter Pipeline is caught in the middle of a takeover battle between two suitors that want to buy the company. The interest has lifted its share price by 160 per cent from lows last year.
In other words, a number of specific issues has driven share prices higher. But is there a broader takeaway here as well?
Perhaps. Companies tend to cut their dividends only as a last resort when times are tough, which means that share prices may be near their lows when cuts are announced.
“It’s the point of maximum pessimism. Some individuals buy the stock for the dividend, and if the dividend isn’t there, it gives them a reason to sell,” Ms. Lau said.
When RioCan cut its dividend in December, its unit price slumped as much as 10 per cent after the announcement and struggled through the end of 2020. The price has rebounded 34 per cent in 2021, though, or more than double the gain for the TSX Composite over the same period.
The dividend cut, it turns out, offered a good buying opportunity.
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