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Will These Dividend Cutters Ever Recover?

Dan Caplinger, The Motley Fool

Dividend investors have simple needs. They want to own stocks that will pay them reliable streams of income through dividends and that have fundamentally strong businesses that will support dividend growth over time.

Unfortunately, even the most promising dividend stocks can't always deliver on those two needs. When they fail, companies often end up cutting their dividends. That hurts shareholders both now and later -- now because the stock almost always drops immediately after the announcement of a dividend cut, and later because the investors no longer get as much dividend income going forward.

Cleaver on a wood cutting board with chopped cash.

Image source: Getty Images.

Yet for long-term investors, the more important question is whether companies can recover fully after a dividend cut. Among the highest-profile dividend-cutting stocks last year, the three you'll see below have worked hard to try to bounce back, but the group has managed only mixed success. In many cases, it can take years for a stock to regain all of its lost ground after a dividend cut, and a lot depends on the strategy that the company takes.

Stock

Dividend Cut

Current Dividend Yield

General Electric (NYSE: GE)

50%, November 2017

3.4%

Mattel (NASDAQ: MAT)

Suspended October 2017

N/A

Sturm, Ruger (NYSE: RGR)

52%, August 2017

1.7%

 Data source: Yahoo! Finance.

Lights dim at GE

General Electric has gone through some tough times recently, with strategic missteps giving the company exposure to the struggling energy and power generation industries at just about the worst possible time. As a result, the industrial conglomerate finally decided last November to reduce its dividend by half, with the intent of paying $0.12 per share on a quarterly basis going forward. That resulted in a big reduction in the stock's yield, although the subsequent share-price drop has since restored GE's dividend yield back above the 3% mark.

At the time, proponents of the move argued that it would free up cash for strategic investment, allowing the business to make targeted investments that would emphasize its strongest business areas and sell off some revenue-generating units that had underperformed. Investors had already expected a cut for several months before the move, as poor earnings had already hit the stock hard and sent yields to unsustainably high levels.

Since the cut, though, General Electric has continued to decline. So far in 2018, the stock is down more than 20%, as many investors fear the potential for more problems to arise. For instance, despite the downsizing of the GE Capital unit, some still believe that the financial business could have hidden risk that could hurt its chances to mount a rebound elsewhere. Even though GE's first-quarter financial report highlighted some potential for better times ahead, shareholders remain unconvinced in new CEO John Flannery's strategic vision for the long-term future of the business. That could prevent a full rebound unless General Electric is able to show concrete progress quickly.

Losing the dividend game

Mattel saw even more pressure on its dividend than GE last year, with the toymaker making two successive moves on the payout front. Last June, Mattel had tried out a 61% reduction in its quarterly dividend from $0.38 to $0.15 per share, hoping that it would result in enough cost savings to support its growth initiatives. Yet after just a short time, it became clear to the company that the move would be insufficient to meet its needs, and Mattel ended up suspending its dividend entirely in October.

Since then, Mattel has mounted a recovery, with its stock gaining 17% so far in 2018. But from a business perspective, it's still been hard work for the toymaker. The liquidation of Toys R Us created more headwinds for the company, as a glut of discounted inventory and the elimination of a key retail distribution partner for Mattel combined to force even more cost-cutting measures. Yet bullish investors still think that the fundamental promise of the toy business is interesting, and after such a long slump, even the slightest of upside surprises could lift Mattel shares higher. Moreover, some still believe that toy rival Hasbro could make a bid to buy out Mattel, resulting in a nice one-time boost to the share price that would provide an attractive exit point for those who've been patient enough to wait out the storm.

Firing blanks

Sturm, Ruger made a big dividend cut last August, reducing its previous quarterly payout of $0.48 per share by more than half to $0.23 per share. But it's also the only one of these three stocks to have made a subsequent upward move in its payout afterward. The reason is that the gunmaker has a variable dividend policy whereby it pays out roughly 40% of its net income rather than keeping a fixed amount.

In the second quarter of 2017, Ruger reported a 22% drop in sales, resulting in earnings falling by more than half from previous-year levels. With expectations in 2016 that tougher gun regulations might limit the ability of buyers to obtain firearms, Ruger had seen revenue soar, but the subsequent election of opponents of gun control to the White House and Congress eased those fears and led Ruger customers to buy fewer guns.

Those fundamental headwinds haven't let up, but the company has managed to reach a new equilibrium and start growing again. In the most recent quarter, Ruger managed to lift its dividend by nearly 40% to $0.32 per share, pointing to favorable impacts from tax reform in boosting earnings and more favorable conditions in the gun market. High-profile mass shootings are still putting pressure on the gunmaker, though, and so it's uncertain whether gains will continue or start to peter out again.

Keep an eye on these stocks

When a dividend stock cuts its payout, it's hard to make a rational decision in the moment. Some stocks manage to recover successfully, while others remain mired in the tough conditions that got them into trouble in the first place. Among these stocks, Mattel and Ruger have made dramatic steps that could lead to better times ahead, but General Electric still has more work to do to convince shareholders that it can make a full recovery.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Hasbro. The Motley Fool has a disclosure policy.