Alcoa joins a growing list of firms cutting dividends
Alcoa (AA) has cut its dividend. No one should really be surprised.The firm's shares have dropped from a 52-week high of $44.77 to under $6. But, the market was taken aback and Alcoa has traded down 10 percent after hours.
What probably happened was that Alcoa looked at its balance sheet and its business prospects and said to itself that in a world without easy credit, it needed a larger buffer against a worsening economy. It will get a bigger buffer by reducing its payout from $0.17 to $0.03. The dividend cut will save $400 million, but the firm went much further to save cash.
According to a statement from Alcoa it plans a series of actions that will reduce costs by more than $2.4 billion annually, reduce capital expenditures an additional $1.0 billion in 2010, and improve working capital by $800 million in 2009.
The cost savings and dividend cuts probably aren't what is hurting the company's shares. What appears to have come as a surprise to most people who follow the stock is that Alcoa is launching a public offering of common stock and convertible notes which should bring in proceeds of $1.1 billion. Most of the money will go to pay down an unsecured revolving credit line.
Why does Alcoa need all of that extra money? Good question. Without any concrete answer from the company, investors are looking at the news as a bad omen about Alcoa's future.
Douglas A. McIntyre is an editor at 24/7 Wall St.