3 Reasons Why Companies Cut Their Dividends

The primary goal of dividend growth investors is to generate a rising stream of dividend income over time. With this in mind, dividend cuts are a dividend growth investor’s worst nightmare.

Fortunately, there are actionable steps that investors can take to reduce their chances of experiencing a dividend reduction. To understand these steps, we must first understand the motivations that cause companies to reduce their dividend payments.

In this article, we explore the three main reasons why companies cut their dividends.

Reason #1: Business Downturn

Perhaps the most common reason why a company cuts its dividend is due to downturns in the underlying business. When a company’s earnings decline to the point where it can no longer cover its dividend, then a dividend cut becomes inevitable for its management team.

R.R. Donnelley’s (RRD) recent dividend cut is an excellent example of a payout reduction that was caused by an overall business downturn. For those unfamiliar with the company, R.R. Donnelley operates as a direct mail marketing and printing services company. Given the arguably outdated nature of the company’s business model, it does not necessarily seem like a growth company. With that said, the company could still have potentially been a good investment if capital was allocated in an optimal fashion by its management team.

Unfortunately, this was not the case. R.R. Donnelley had failed to generate any meaningful per-share business growth in the years leading up to its dividend cut.

RRD EPS History

Source: Sure Analysis Research Database

While there were other factors (including business unit spinoffs) that impacted R.R. Donnelley’s financial performance, the overall decline in its core business was the primary reason why the company reduced its payout. Investors looking to avoid a similar situation moving forward should choose to invest only in companies whose fundamental metrics – including earnings and revenues – are growing at satisfactory rates.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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