Two more companies joined the ranks of the dividend cutters, as PNC Financial (PNC) and International Paper (IP) both took a significant bite out of their yields. The move is clearly an effort to strengthen the balance sheet as PNC will be able to conserve $1 billion in capital per year because of this 85% reduction. This strategic move was not hard to anticipate because PNC’s yield had crept up over 10% and the dividend payout ratio was about 93% of this year’s expected profits. 

Banks are not alone in this move to batten down the hatches for more tough months ahead, as International Paper reduced their dividend by 90% today in order to save $100 million per quarter. International Paper had held their quarterly dividend constant at 25 cents per share for every quarter going back 13 and a half years. For a company like IP, that has lost 81% of their market value in the last 6 months; the current yield of more than 17% was not sustainable. The company is much better served paying down its debt than paying out their meager profits to shareholders. This is what was said as news broke on Fox Business this morning, “International Paper (IP) is cutting its dividend. This after General Electric slashed its dividend on Friday. S&P is estimating the biggest drop in dividend payments since 1938.”

We tend to agree with S&P that these dividend cuts will continue for the next few months, until the crazy high yields are no longer out there. It is no surprise that many of these high yielding companies are in financials which are the hardest hit of all sectors. Some companies that we expect will likely join this group in the near future: AXA (AXA), Barclays (BCS), Lloyd’s Banking Group (LYG) and Royal Bank of Scotland (RBS). As you can see with IP off more than 8% and PNC off by almost 6%, it is not advisable to go chasing after an extremely high yield because there is no such thing as a free lunch, especially in this market.

Ockham Research Staff
www.ockhamresearchstaff.com