Dividend stocks can generate plenty of recurring income for your portfolio every year. But investors should always remember that these payouts are never guaranteed. A company facing trouble with its finances might have to resort to cutting the dividend if it can't find a better option.
The market is full of examples of companies slashing their payouts for a myriad of (good and bad) reasons. Three companies that had to cut their dividend payments by more than 40% in the past year are Walgreens Boots Alliance (NASDAQ: WBA), Medical Properties Trust (NYSE: MPW), and Cracker Barrel Old Country Store(NASDAQ: CBRL).
Let's look at why they did it and whether these three stocks could now potentially be good contrarian investments.
1. Walgreens Boots Alliance
Pharmacy retailer Walgreens Boots Alliance has struggled with profitability for multiple years. The company typically generates modest single-digit percentage profits in most quarters, but it isn't uncommon for the business to land in the red, too. In three of its past four quarters, Walgreens posted a net loss.
In January, the company announced it would reduce its quarterly dividend payout from $0.48 per share to just $0.25 (a 48% cut). It was a seismic move for a company that had been paying and increasing its dividend for decades. The move came not long after the company hired a new CEO, Tim Wentworth. One reason for the cut was to bolster finances needed to continue its plans to launch hundreds of clinics as part of a broad healthcare strategy.
Investors can still collect a high 6.3% yield from Walgreens stock, but without stronger financials, even the new dividend might not be sustainable in the long run. Walgreens is also actively trying to sell its Boots pharmacy chain in the U.K. to raise additional funds, but it isn't getting much buyer interest.
Walgreens shares haven't been this cheap in more than a decade, so it could be an intriguing investment for contrarians. But with an uncertain path forward, this is a stock that investors will want to keep on a tight leash as losses could continue to pile up for both the company and its shareholders.
2. Medical Properties Trust
Medical Properties Trust has endured problems with financially troubled tenants for multiple years. Steward Health in particular has been a big concern for the healthcare-focused real estate investment trust (REIT). It needs its tenants to pay rent, and Steward and a few other healthcare companies have been struggling to do just that.
Medical Properties Trust even provided Steward with financial support over the years, but that hasn't resolved the tenant's problems; in May, Steward announced it was filing for bankruptcy protection and that it would be selling its hospitals.
Well before that, in August 2023, the REIT announced a new quarterly per-share dividend of $0.15, down from the $0.29 it was previously paying (a 48% cut). Given the uncertainty around the future of Steward Health, there's still ample risk relating to Medical Properties Trust and its dividend.
As with Walgreens, the healthcare stock hasn't traded at its current levels in more than a decade so there could be significant upside for contrarian investors, but there might be significant losses to come as well. Investors should buy the stock at their own risk as the REIT still likely faces a bumpy road ahead.
3. Cracker Barrel Old Country Store
Cracker Barrel operates 660 locations across the country with a restaurant and gift shop. It offers multiple reasons for customers to visit one of its stores, but lately, that hasn't been proving to be enough. So the company is investing in its operations to help grow profitability because traffic levels haven't been particularly strong.
It is going to innovate its menu and remodel stores, and it has hired an agency to help strengthen its brand. All these things, however, require cash, and the company is going to free up the money by slashing its per-share dividend from $1.30 per quarter down to just $0.25, for a massive 81% reduction in the payout.
Profits have been lean for Cracker Barrel, with the company reporting a profit margin of just 2.9% in its last fiscal year (which ended in July), and a challenging economy is exacerbating its struggles. Trading at 10 times its future earnings and with the stock trading at levels it hasn't been at since 2011, Cracker Barrel looks cheap. But it certainly comes with plenty of risk.
If the restaurant chain's efforts to revitalize its stores pay off, this could be yet another turnaround play with significant upside potential. However, due to the high risk involved, Cracker Barrel is a stock that will be primarily suitable for contrarian investors who are willing to be patient. It could be a while before the company's moves pay off -- assuming they do at all.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Cracker Barrel Old Country Store. The Motley Fool has a disclosure policy.
