Endangered Dividends

Energy pipelines are the highest yielding sector in our Utility Report Card coverage universe. Ironically, after a five-year bear market, dividend risk is actually quite low for the handful of companies and master limited partnerships we track.

16 Utility Report Card companies reduced their dividends in calendar year 2019. That compares to 128 raising payouts, 23 that held them level and 27 that currently pay no dividend.

It’s survival of the fittest in the communications sector. And as rising competition, surging capital spending and tough regulation shrink free cash flow, the wave of dividend cuts is hitting all but the largest and strongest players.

Deutsche Telekom (Germany: DTE, OTC: DTEGY) cut in its annual dividend to 60 Euro cents, from last year’s 70 Euro cents rate. The move surprised us because business is good.

Buckeye Partners (NYSE: BPL) exited the Endangered Dividends List last spring, following its all-cash takeover offer of $41.50 per share from Australia’s IGM Investors in May. Last week, the deal inched closer to a fourth quarter 2019 close, as the Committee on Foreign Investment in the US and Pennsylvania Public Utilities Commission signed off.

Just because someone is offering doesn’t necessarily mean anyone will buy. That’s the hard lesson for shareholders of retail energy marketer Just Energy Group (TSX: JE, NYSE: JE). The stock has lost nearly -70 percent of its value since management announced a “strategic review” due to “outside interest” in early June.

UK-based integrated energy company Centrica Plc (London: CNA, OTC: CPYYY) will cut its semi-annual dividend payable in November to GBP1.50 per share, from the year ago rate of GBP3.60. Management also announced a reduction in the “Final” dividend to be declared in February from GBP8.40 to GBP3.50 per share.

Buckeye Partners’ (NYSE: BPL) first quarter earnings results had all the hallmarks of a company careening towards another distribution cut. Then Australian private infrastructure fund IFM came along with a $41.50 per unit all-cash takeover offer. That’s given long-suffering unitholders their best opportunity to cash out since early 2018.

Management’s rationale is identical to that of other telecoms cutting the past couple years. It needs more cash to tackle a wall of pending debt maturities, even as capital spending needs pick up for next generation 5-G wireless and competition pressures 4-G revenues.

Until last month, Consolidated Communications (NSDQ: CNSL) was an anomaly in the wireline telecom business: The only company in the sector that had not cut its dividend at least once, dating back to the July 2005 initial public offering.

But starting this summer, Consolidated will pay no dividend, using the savings to pay off debt. I highlight the details in the April 29 Income Insights “Comcast’s Big Gains are its Smaller Rivals’ Pain".