Endangered Dividends

Three energy utilities “down under” have announced next semi-annual dividends will be lower than the previous year’s: AGL Energy (ASX: AGL, OTC: AGLXY) by -12.8 percent, Contact Energy (NZ: CEN, OTC: COENF) by -12.5 percent and Origin Energy (ASX: ORG, OTC: OGFGY) by -16.8 percent.

Zero companies in our Utility Report Card coverage universe announced dividend cuts last month. To date, only a small number have shared calendar Q4 results and guidance. But that’s still a very good sign managements are comfortable with steps taken so far to deal with what for most are still quite challenging business conditions.

Last year, 25 coverage universe companies cut or eliminated dividends. That’s more than one in eight we track and compares to just 16 in 2019. And it was the largest number in at least a decade for this group of ordinarily super-stable and financially strong companies.

Avoiding companies at elevated risk to dividend cuts is a time-honored tenet of income investing. That’s because reductions typically add insult to injury by triggering selloffs in offending stocks.

Energy Transfer LP (NYSE: ET) and Infraestructura Energetica (Mexico: IENOVA, OTC: IENVF) are the 25^th and 26^th dividend cutters from our Utility Report Card coverage universe in calendar 2020.

The silver lining is management’s decisions were clearly made for preference, rather than of necessity. That’s encouraging for both companies as well as others we track, with the result our Endangered Dividends List is the shortest it’s been all year.

Essential services companies by their nature provide something that’s always needed. So it takes a major catastrophe this year’s pandemic and economic fallout to really shake up our Utility Report Card coverage universe.

The price of oil has been steady for a while around $40 a barrel and natural gas is over $2.50 per thousand cubic foot. But some energy companies are still downsizing dividends. Origin Energy (ASX: ORG, OTC: OGFGY) is cutting its semi-annual dividend for October to 10 cents Australian. That’s haircut of roughly one-third for the Australian power producer, electricity retailer and LNG investor.

Oil prices have stabilized around $40 a barrel the past two months. And a hotter than anticipated summer has pushed North American benchmark natural gas to more than $2 per million British Thermal Units.

Three Utility Report Card coverage universe companies cut dividends since the June issue of CUI posted. What makes them unique is all of them rate buys, as holding in cash now is sowing the seeds for rich returns over the next 12 to 18 months.

May set records for S&P 500 dividend cuts, with 18 companies suspending and 5 others reducing. They were joined by 3 non-US essential services providers from our Utility Report Card coverage universe.

AusNet Services (ASX: AST, OTC: SAUNF) raised its semi-annual dividend for payment in June by 4.9 percent. But the Australian electricity distribution utility also issued guidance for a payout cut of -7 to -12 percent for the next 12 months.