Much has been talked about
investing in companies that pay higher dividends year after year, so that we
could receive larger amount of passive income year after year.
Dividend growth is SWEET to hear,
what about the company that you invest into CUT its dividend payment?
Dividend cut is surely the two
unpleasant words a dividend investor would like to hear generally speaking. A company may cut its dividend if its
profitability position declines i.e. falling profits, this may lead to decline
in share price and could hit investor twice in terms of lower dividend received
and potential capital loss or reduction in unrealised gains.
If a company cuts dividend due to
the need to conserve more cash for near term project expenditure which may
contribute to better profit in the future, this situation does not warrant
caution still. But if the dividend cut is due to decline in profits and
investors do not expect near term significant recovery in the company’s
profitability, the investor better adopt a cautious hat.
One example is Lafarge Malaysia
Bhd which involves in the cement industry, that has been hit hard in recent
years due to fierce competition in cement industry, rendering depressed cement
selling price, and it was loss-making in 1Q 2017.
If you look at the dividend
payment trend below, its historical dividend has been healthy and investor
should not assume the dividend payment trend to repeat as it very much depends
on the profitability of the company or industry.
Lafarge cut its dividend in 2016
in view of the challenging operating environment. Needless to say, share price has also plunged
from around RM9 in early 2016 to current share price of RM5.7, it
translates into 37% loss in share price.
Hence, when we invest into
cyclical companies that pay stable dividend in the past, we should always be
cautious on the possibility of dividend cut due to fundamentals of the company
or industry turning bad.
Dividend cut and share price
decline are definitely, a blow to an investor portfolio.
