We recently compiled a list of the 10 Biggest Dividend Cuts and Suspensions of 2024. In this article, we are going to take a look at where Baxter International Inc. (NYSE:BAX) stands against the other stocks.
Dividends hold great appeal for investors—they appreciate receiving them and strongly dislike reductions. Despite this, numerous major companies have reduced their dividend payments over time for various reasons. This trend, which gained momentum in 2020, persists as many companies continue to recover from the financial impact of the pandemic, leading to further dividend cuts.
According to research by McKinsey, outside of financial crises, only 1% to 2% of dividend-paying companies reduce their payouts annually, typically involving seven or eight major firms. The key for investors is to identify such companies in advance and avoid them until after the dividend has been reduced, which can present new opportunities. However, predicting which companies might cut dividends can be challenging. Wolfe Research strategist Chris Senyek highlighted three warning signs: excessively high yields, which may indicate underlying problems; high debt levels, which divert cash flow to interest payments rather than shareholders; and a high payout of free cash flow, leaving little cushion for the company in times of economic downturns or recessions.
Also read: 10 Dividend Stocks For Steady Income
While dividend cuts are generally disappointing for investors, Morgan Stanley offers an interesting perspective on them. Although dividend stocks typically suffer when payouts are reduced, some of these stocks might still present opportunities, according to the firm. Companies often cut dividends due to financial difficulties or economic challenges. Research from Morgan Stanley shows that investors usually sell off these stocks in the six months after the cuts are announced. However, once the initial negative reaction is factored in, there may be attractive buying opportunities in certain cases, as noted by strategist Todd Castagno. Here are some comments from the analyst:
“In the 6-months following a change in regular quarterly dividend policy, we found companies that announced a dividend cut of more than -25% underperformed the market by -1,200 bps, on average, while smaller dividend reductions outperformed by +480 bps, on average.”
According to Castagno, one year after announcing a dividend reduction, companies that cut their payouts by 30% or less outperformed the market by 1,900 basis points, while those with cuts deeper than 30% lagged the market by 1,800 basis points on average. Morgan Stanley analyzed Russell 1000 dividend-paying companies that reduced their dividends between 1962 and 2024. Over the past year, numerous companies have lowered their payouts, and the firm compiled a list of 30 such companies, excluding those in the financial, utilities, and real estate sectors. While many firms implemented significant dividend cuts, several reduced their dividends by 30% or less.
That said, many companies have regained strong footing and recovered quickly after the pandemic, which has led to a decline in the number of dividend cuts over the years. A report by S&P Dow Jones Indices revealed that only 27 companies reduced their dividends in Q3 2024, marking a 56.5% decrease from 62 companies in Q3 2023. The total value of these cuts was $4.6 billion in Q3 2024, down from $9.2 billion in the same quarter the previous year. Over the 12 months ending in September 2024, 140 companies reduced their dividend payments, a significant 70.8% drop from 479 cuts in the prior 12-month period. The overall value of dividend decreases for the current period was $19.5 billion, a 26.4% reduction compared to $26.4 billion during the previous 12 months.
Despite these encouraging numbers, many major companies have disappointed investors by reducing their dividend payouts in 2024.
Our Methodology:
For this list, we checked companies that have announced dividend reductions in 2024 due to the current market conditions and other factors and picked 10 prominent names from that list. Next, we ranked these stocks according to the number of hedge fund investors having stakes in them at the end of Q3 2024, according to Insider Monkey’s database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Patients connected to dialysis machines in a hospital ward, highlighting the company’s dialysis and intravenous therapies.
Baxter International Inc. (NYSE:BAX)
Number of Hedge Fund Holders: 35
Baxter International Inc. (NYSE:BAX) is an American multinational healthcare company that specializes in products to treat kidney diseases and other chronic medical conditions. In November, the company cut its dividend by 41% in anticipation of its planned $3.8 billion sale of its kidney-care division to Carlyle Group. Last year, the company announced the creation of a standalone kidney-care company as part of a larger restructuring, and in August, it finalized an agreement to sell the unit to Carlyle, with the transaction expected to close by late 2024 or early 2025. Baxter, which had previously stated it would use the approximately $3 billion in after-tax proceeds from the sale to reduce its debt, explained that the new dividend rate aims for a payout ratio of about 25% of adjusted earnings. Since the start of 2024, the stock is down by over 24%.
Baxter International Inc. (NYSE:BAX) reported revenue of $2.7 billion in the third quarter of 2024, down 27.2% from the same period last year. Despite the challenges, the company expressed confidence in its progress. It stated that the pending sale of its Kidney Care business marks another key milestone in its ongoing transformation. In addition, significant strides have been made in the hurricane recovery efforts at the North Cove, North Carolina, facility, driven by the dedication and resilience of the Baxter team, in collaboration with government agencies.
This was also highlighted by Broyhill Asset Management in its Q3 2024 investor letter. Here is what the firm has to say:
“Baxter gained 14%. The third quarter was a busy period for Baxter. The company entered into an agreement with Carlyle to sell its Kidney Care segment for $3.8 billion. The proceeds will allow it to pay down debt ahead of schedule, simplifying its balance sheet while it continues to drive operational improvements. During the quarter, Hurricane Helene disrupted supply at the company’s facility in North Carolina. Baxter is no stranger to IV supply disruptions, and we expect the current interruption will be immaterial to its long-term results.”
Baxter International Inc. (NYSE:BAX) dividend cut should not be a surprise for investors as the company’s cash flow has been affected recently. In the first nine months of the year, the company generated $376 million in operating cash flow, down from $792 million in the same period last year. It offers a quarterly dividend of $0.17 per share and has a dividend yield of 2.31%, as of December 22.
Baxter International Inc. (NYSE:BAX) was included in 35 hedge fund portfolios at the end of Q3 2024, compared with 40 in the previous quarter, as per Insider Monkey’s database. The stock held by these funds has a consolidated value of nearly $2 billion.
Overall BAX ranks 4th on our list of the stocks with the biggest dividend cuts in 2024. While we acknowledge the potential of BAX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than BAX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
