Cliffs Natural Resources Inc (NYSE:CLF), which mines for iron ore and coal, has been a recent dividend darling. No more — the company trimmed its distribution by 76% starting in the first quarter of fiscal 2013. And Cliffs isn’t the only company that’s cut its dividend lately. Here’s what investors can learn from some recent dividend cuts.
Cliffs
Cliffs has two divisions, a global commercial group that sells and delivers raw materials and a global operations group that mines them. The company operates iron ore and coal mines in North America and has two iron ore mining complexes in Western Australia. It also owns a 45% economic interest in a coking and thermal coal mine in Queensland, Australia, and is working on a chromite project in Ontario, Canada. It is a notable player in the iron ore space.
The company’s dividend hasn’t been a model of regularity. In fact, the dividend has been cut before. That should have been one warning sign for investors attracted to the company’s high yield. The interesting thing, however, is that Cliffs Natural Resources Inc (NYSE:CLF) more than doubled the quarterly dividend in early 2012. That sent a message of strength, but turned into a dividend trap.
The Cut
Here’s how the company announced that it would take an axe to its payout: “In light of recent commodity-price volatility, Cliffs is committed to maintaining financial flexibility and supporting an investment-grade profile as it executes Bloom Lake’s Phase II expansion. As such, subsequent to quarter end, Cliffs’ Board of Directors approved the reduction of the Company’s quarterly cash dividend rate by 76% to $0.15 per share.”
The stock fell some 20% on the news.
In addition to the cut, the company is set to issue both new common shares and convertible preferred shares. So, not only is the company trimming its dividend, it is also diluting shareholders’ current stakes in the company. These are the actions of a company that has problems, not a company that is succeeding. Clearly, the difficult market environment in its core iron ore and coal businesses has taken a toll. So, too, has the company’s poor execution in some of its recent expansion efforts.
Nokia Corporation (ADR) (NYSE:NOK)
Another company that cut its dividend recently was Nokia: “To ensure strategic flexibility, the Nokia Board of Directors will propose that no dividend payment will be made for 2012 (EUR 0.20 per share for 2011). Nokia’s Q4 financial performance combined with this dividend proposal further solidifies the company’s strong liquidity position.”
Nokia, however, hadn’t made a massive dividend increase just months prior to the cut. The unfortunate takeaway from Cliff’s is that companies sometimes don’t made the best decisions with regard to dividends. Usually, this means holding on to a dividend level longer than it probably should, which is what happened at Nokia and also at Washington REIT, which also recently cut its dividend after years of regular increases.
Nokia and Washington REIT are both likely to be stronger companies for their dividend cuts. Nokia, specifically, still has plenty of cash on hand. However, it wants to ensure that remains the case while it tries to play catch up in the handset business it once dominated. Now, in fact, might be a good time for aggressive investors to look at the shares for their recovery potential since a shoe that many had been expecting to drop finally has. Cliffs, on the other hand, seems to be in worse shape than many believed, highlighted by the stock and preferred issuances.
