5 Companies Slashing Their Dividends

Telecom Italia
Telecom Italia

If there's one thing investors never tire of, it's earning dividends. Over the past year, thousands of companies have been happy to comply, raising their dividends and rewarding shareholders with higher payouts.

But lately, we've seen a pullback, with some companies deciding to cut back on or eliminate their dividends altogether. Here's a look at five companies that made this unpopular move, and why.

1. Cliffs Natural Resources (CLF): Cliffs Natural recently cut its dividend by 76 percent, from $0.625 per share quarterly to $0.15. The company produces both iron ore and metallurgical coal, two key ingredients for steel production. When the global economy was stronger, demand for steel from construction and infrastructure development projects was high. But weaker conditions recently, especially in high-growth areas of the world like China, have led to plunging prices for the raw materials that go into steel.

With huge amounts of debt on its balance sheet, Cliffs cut its payout in order to preserve cash and avoid adverse action from bond-ratings agencies on its outstanding debt. With the drop, the stock now yields just 2.4 percent.

2. CenturyLink (CTL): CenturyLink reduced its dividend by about 25 percent in February, cutting its quarterly payout from $0.725 per share to $0.54. CenturyLink is a major provider of telephone, Internet, and video services to customers in rural areas. Like its peers Windstream (WIN) and Frontier Communications (FTR), CenturyLink has struggled against the trend of customers giving up old-style landlines in favor of wireless services supplied by its competitors.

Although the company has had some success in finding growth from its more lucrative broadband Internet access, the steady stream of departing landline customers put enough pressure on CenturyLink's cash flow that it chose to cut its dividend. Even after the drop, the stock still yields 6 percent.

3. Exelon (EXC): Utility company Exelon announced in February that it would cut its second-quarter dividend by more than 40 percent, with a new payout of $0.31 per share on a quarterly basis compared to the old $0.525-per-share dividend. Exelon has the most extensive stable of nuclear power plants in the country, and under ordinary circumstances, that has given the company a cost advantage over other power-generation alternatives.

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But with prices of coal and natural gas so low right now, Exelon's margins have been squeezed. Moreover, due to the need to invest in capital improvements to boost the efficiency of its reactors, Exelon decided that keeping more of its cash was a smarter way to maintain its credit rating while still leaving the door open to future growth. When the cut takes effect, Exelon's dividend yield will drop to about 4 percent.

4. Telecom Italia (TI): Italian phone giant Telecom Italia said last month that it would cut its dividend by half over the next three years. The move is part of a strategy to raise capital in order to build out more advanced next-generation wireless networks and to get a firmer grip on its debt-ridden balance sheet.

Given the economic turmoil in Italy and elsewhere across the continent, the need for restructuring is consistent. Telecom Italia should have a dividend yield of about 3 percent once the cuts are completely phased in, based on current stock prices.

5. Vale (VALE): Vale announced in late February that it would cut its minimum dividend payout by more than a third, aiming to save roughly $2 billion in payouts to investors this year. Like Cliffs Natural, Vale is a mining company, producing iron ore as well as copper, nickel, coal, and other precious and base metals.

The high expense of mining operations, combined with potentially costly tax litigation and weak revenues from low commodity prices, forced the company to make the cuts in order to preserve enough capital to finance new projects and expansions of existing mines. With the cut, Vale's yield will fall to about 2 percent.

Watch Your Dividends

These five examples show that dividend investors can't count on ever-increasing payouts from the stocks they own. Be sure to keep watching your companies for signs of weakness that could lead to an eventual dividend cut.

Motley Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Exelon.

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