Nokia Corporation (ADR) (NOK): Are Dividend Cuts Always a Bad Thing?

Even if you are a fan of buybacks, doesn’t this seem a little sketchy? Why cut the dividend by 25% — effectively cratering your stock over 20% in the process — just to buyback stock? Maybe, they are looking to prop up earnings per share amidst declining cash flows in the future. Or maybe, I am missing something here.

If the company’s new capital allocation plan works, then it works. The bottom line is that CenturyLink plans to increase its cash position, continue to offer a competitive dividend with a more sustainable payout ratio, and eliminate more debt. If the buyback jump-starts the share price in the process, maybe this is a good thing for long-term shareholders.

The bottom line

Dividend cuts can be seen as good if they are already assumed, and somewhat baked into the price. A dividend removal to a speculative stock like Nokia Corporation (ADR) (NYSE:NOK) is usually good if the saved cash helps the company turnaround and achieve
probability. The dividend can be restored later when earnings are consistent.

It’s less thrilling when a company like Exelon, a utility usually bought solely for its yield, reduces it dividend payout, while execs fail to feel the same pain. Buying Exelon after the dividend reduction, however, is much more soothing for a shareholder. Once cut, the chances of the dividend being cut again are unlikely. Exelon now appears like a good value play with a much more sustainable dividend. Its credit rating should also be safer with more cash on its books.

CenturyLink sends mixed signals. I would probably avoid this one, or watch it closely to see what direction the company is heading towards, and how the new capital allocation program is faring. If CenturyLink starts to turn around, and strengthen financially in a sustainable way, they might also make a good value play.

Dividend eliminations and reductions aren’t always bad, especially if they improve a company’s long-term fundamental picture. It sure stinks being the shareholder left with the bag, though.

The article Are Dividend Cuts Always a Bad Thing? originally appeared on Fool.com and is written by Joseph Harry.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.