Dividend Champions are companies that have survived the past two recessions. I wanted to understand why companies that historically had been Dividend Champions lost that status and came to realize that this situation is quite rare. Part 1 examined three dividend cutting companies and part 2 looks at the other five more companies of interest before applying what has been learned into an actionable future.
Supervalu Inc. – Stuck in the Middle
One may wish to blame the recession for Supervalu’s problems, and while that is partially true, competition and its inability to react is more on target. Whole Foods was at one end of the food spectrum with its dominance in the organic and health-food segment. The other end showed Wal-Mart offering the same products at discounted prices. Supervalu was stuck between the two extremes.
These two ends placed pressure on traditional grocery store chains and some reacted better than others. Kroger, for example, boosted the quality of their store brands through self-owned manufacturing facilities, offering savings and speed to the market. Supervalu did not recognize this opportunity and was crushed as unemployed and underemployed looked elsewhere to save money.
After 35 years of dividend increases, in 2009 Supervalu announced that they were cutting their dividend in half, and the dividend was suspended three years later. By then the yield had risen to 7.6%, compared to the 3.6% of Safeway and 2% of Kroger. With the announcement, the stock fell 40% and the company is now owned by United Natural Foods Inc.
Seeing the dividend cut coming may have been possible, as the company had shown six consecutive quarters of declining same-store sales. As the economy recovered, the low-margin grocery sector continued with its problems. Supervalu had acquired Albertson’s and struggled with the resultant debt. The burden of the dividend got to the point where it finally became untenable.
Avery Dennison – Down but Not Out
Avery Dennison Corp. (AVY) manufactures pressure-sensitive materials, merchandise tags, and labels. They are another case of seeing dividend growth come to a crawl before their dividend cut. The 2000 quarterly dividend was $0.27, which was increased by $0.03 the following two years, then $0.01 over the next five years before being sliced in half in 2009 when the yield had risen to 8.5%.
The economic downturn and financial crisis of 2008 had taken its toll on the company and it had been unable to cover its dividend payment over the two quarters before the cut. The cut was something that one could have anticipated by noting the slowing of dividend growth over time and realizing the payout ratio was unsustainable.
In this case, the dividend cut was not the end of the world for Avery Dennison. Since cutting the dividend to $0.20, the company increased its dividend in 2011 and has continued doing this each year (current dividend is $0.58), so they are now a Dividend Challenger.
The Dividend Champions spreadsheet shows a five–year dividend growth rate of 11%, which is healthy. The stock price tripled over the past five years before being knocked down by the current recession. With a current payout ratio of 29.7, the company appears poised to eventually move from the Dividend Challenger to Dividend Contender ranks.
Masco Corp. – Inch by Inch
Masco (MAS) is a manufacturer, distributor, and installer of home improvement and building products. When the housing market fell apart so did the company’s 50-year history of growing their dividend. With a dividend yield over 10% and saddled with debt the balance sheet was unable to support its payments.
Masco’s 2007 quarterly dividend of $0.22, which had been increasing by $0.02 per year over the previous four years, slowed to a one-cent increase representing a 1% dividend growth, then half a cent in 2009 before cutting its dividend by two-thirds. Earlier in the year, they had projected that the company would, at best, break-even for the year as sales from new home construction and falling house prices hurt the demand for their product.
Again, we see a case where a company had been increasing its dividend in the normal 5% range slow down dividend growth until problems forced the cut. In this case, their cut to $0.075 remained until 2014 when they began increasing it again.
Today Masco is only offering a $0.135 dividend, which translates to a 1.35% yield, but the payout ratio of 15% makes that easily sustainable. Like Avery, Masco is a Dividend Challenger.
General Electric Co. – The Giant Falls
After 32 years of dividend growth, General Electric (GE) succumbed to problems caused by the recession, in large part due to GE Capital, their capital finance division. The company wanted to maintain its Triple-A credit rating, which allowed them to borrow at cheaper rates but came with the requirement of a significant amount of cash on hand. With a payout ratio approaching 90%, the dividend yield of nearly 12% offered no way for GE to increase its dividend, so it was slashed it from $0.298 to $0.096.
I could have included General Electric in the category of financial institutions affected during the Great Recession but wished to take note that even the largest of companies can fall. Although the company increased its dividend in 2010 and continued with increases until 2015, followed by small increases in 2016 and 2017 they sliced it in half in 2017, and finally all but ended it in 2019 when they reduced it to a token one cent.
Pfizer Inc. – Back From the (Almost) Dead
Pfizer (PFE) is one of the world’s largest pharmaceutical firms, with annual sales over $50 billion. I contributed to their dividend reinvestment program from 1997 through 2008, at which time my confidence in the company waned. The world’s largest maker of drugs had been doing well, but on the horizon was the fact that their blockbuster drug Lipitor would soon be opened to the generics.
As the eroding stock price and Pfizer’s payout ratio of 108% in 2008 gave me pause, I sold with the realization that a dividend cut might be in the future. They halved their dividend in 2009 to afford the purchase of Wyeth in an attempt to diversify into vaccines and injectable biologic medicines. Thus ended 41 years of dividend growth.
Since that time Pfizer has continued to grow its dividend, returning to the $0.32 in 2017 it had been before the cut. Now with ten consecutive years of dividend growth, Pfizer is a Dividend Challenger, showing a 6.1% dividend growth over that time.
Looking at the Future
The financial crisis of 2008 was due to a failure in the financial system that had manipulated the real estate sector. All companies with exposure to these groups, as well as others that happened to be in the same sectors, were adversely affected. There is no protection in this situation as even very large companies like Bank of America and General Electric were forced to stop growing their dividend.
Recessions that affect a particular sector place companies within that group in jeopardy of having to survive through dividend cuts. Freeing up cash allows flexibility to solve problem issues, and the immediacy of survival is paramount.
Of the eight companies examined that cut their dividends, five had previously been showing anemic dividend growth. This is a red flag that the company is saddled with the distribution of its dividend and if the payout ratio exceeds 100% then it could signal an impending cut.
This knowledge can give us a clue as to what we might expect with current Dividend Champions. Using the Dividend Champions spreadsheet to sort them by a five-year dividend growth rate we see that 14 companies are flagged as not having had a dividend increase for more than one year.
| Company | Ticker | Sector | Industry | No. Yrs | Div. Yield | DGR 5-yr | EPS% Payout |
|---|---|---|---|---|---|---|---|
| Mercury General Corp. | MCY | Financials | Insurance | 33 | 6.19% | 0.4 | 43.6 |
| Pentair Ltd. | PNR | Industrials | Machinery | 44 | 2.55% | 0.6 | 35.7 |
| Northwest Natural Gas | NWN | Utilities | Gas Utilities | 64 | 3.09% | 0.6 | 86 |
| First Financial Corp. | THFF | Financials | Banks | 31 | 3.08% | 1.2 | 27.4 |
| United Bankshares Inc. | UBSI | Financials | Banks | 45 | 6.07% | 1.2 | 54.9 |
| Westamerica Bancorp | WABC | Financials | Banks | 28 | 2.79% | 1.4 | 55 |
| People’s United Financial | PBCT | Financials | Banks | 27 | 6.43% | 1.5 | 55.9 |
| Universal Health Realty Trust | UHT | Real Estate | REITs | 34 | 2.72% | 1.5 | 198.6 |
| Nucor Corp. | NUE | Materials | Metals & Mining | 47 | 4.47% | 1.6 | 38.9 |
| Helmerich & Payne Inc. | HP | Energy | EnergyEquipment &Services | 47 | 18.15% | 1.6 | n/a |
| Urstadt Biddle Properties | UBA | Real Estate | REITs | 26 | 7.94% | 1.7 | 203.6 |
| Brady Corp. | BRC | Industrials | CommercialServices &Supplies | 34 | 1.93% | 1.7 | 33 |
| Thomson Reuters Corp. | TRI | Financials | Capital Markets | 27 | 2.24% | 1.8 | 205.4 |
| Old Republic International | ORI | Financials | Insurance | 39 | 5.51% | 1.8 | 23.9 |
The dividend yield and payout ratios that jump out as a problem are highlighted in red.
At one time I owned Helmerich & Payne (HP) but sold when I felt that their dividend could not be sustained. Their current dividend yield over 18% is a problem as is the case with companies associated with the falling price of oil. The EPS Payout is listed as “n/a” because earnings were most recently negative but based on trailing 12 months of earnings it comes to 162%. This means that they will need to borrow money or sell assets to pay the dividend. This is a situation ripe for a dividend cut.
Other red flags are found in the payout ratios of Universal Health Realty Trust, Urstadt Biddle Properties, and Thomson Reuters Corp. Ratios over 100 are problematic but can be dealt with. However, combined with a slowing dividend growth rate we have seen is a signal that a dividend cut may be in its near future.
Universal Health Realty Trust (UHT) has historically upped its dividend by only half a cent since 2000. This has translated to a 1.3% growth rate over the past ten years.
From 2000 through 2010 Urstadt Biddle Properties also offered half-cent increases, switching to quarter-cent increases for five years before returning to one-half cent. Dividend growth over the past 10 years has been 1.4%.
Thomson Reuters increased their dividend by portions of a cent from 2002 to 2008, when they switched mostly to a full cent for five years before returning to a portion of a cent for six more years. The 2.5% dividend growth rate over the past 10 years has slowed to 1.8% over the past five years.
Slowing dividend growth combined with a payout ratio over 100% does not give the dividend growth investor confidence that dividends will not be cut in the future. These are signs that a dividend cut may be in the future and should be taken into consideration by the investor.
Finishing Up
There are about normally 100-125 Dividend Champions at any particular time. From 2008 through 2017 the average number of companies employing dividend cuts for any reason is 3.3%. Remove the 2008-2009 timeframe and that becomes 1.7%. To put this into context, there is a 1.8% chance that one of these companies will be acquired.
As a testament to its rarity, the most recent Dividend Champion to be removed from the list not due to being acquired or the spinoff of a section of the company, was Pitney Bowes in April 2013. So it has been seven years since this group has presented an investor with a deleterious dividend cut.
As is known by everyone, there are no guarantees for the future. Of the 140 current Dividend Champions, certainly, some will eventually cut their dividend. But selecting companies within this group that have consistent and meaningful dividend growth along with a reasonable payout ratio makes one as sure as possible that they will retain their dividend well into the future.
