What General Electric Company’s Dividend Cut Means for Canadian Investors

After a dividend cut from U.S. giant General Electric Company (NYSE:GE), investors in National Bank of Canada (TSX:NA) may need to be concerned.

| More on:

U.S. giant General Electric Company (NYSE:GE) recently announced a dividend cut, halving the amount paid to investors, as the conglomerate continues to have a difficult time. Although company management made it clear that the decision to make this cut was in the best interests of total shareholders’ returns, the market did not react well to this announcement. Shares of the company, which have traded at a 52-week high of US$32.38, declined from more than US$21.50 to less than $18 per shares in the days that followed the news.

While many retail investors bought into this behemoth due to the high dividend, the fact that has been missed by many is the new yield for shareholders purchasing shares today is almost 2.75% given this significant decline. At the previous 52-week high, the dividend was no more than 2.5%!

Although many investors are currently overreacting and selling out of their shares, it it important to realize that the metric known as yield on cash (YOC), which is the yield on a person’s original investment, is not what is most important. Instead, income investors need to compare what they are currently being offered at with what else is available on the market.

Given the market’s negative reaction to this dividend cut, many companies may now be loathe to cut their dividends until there are no other choice. For investors in Montreal-based National Bank of Canada (TSX:NA), this should be of particular concern. The company, which was one of the only major Canadian banks to ever cut its dividend (now a generation ago) in the 1980s and then again in the 1990s, investors may need to be very concerned once again.

The company has been the worst performing of all the big banks. It has seen earnings per share move sideways over the past four years, while the dividend-payout ratio (as a function of net profit) has increased from 38.5% in 2013 to 52% in fiscal 2016. Throughout the first three quarters of 2017, the bank has gotten things back on track, paying out only 42% of earnings as the economy in Quebec has been performing extremely well over the past year. Should the provincial economy turn once again, the bank, which has a very concentrated footprint, may face substantial risk. As a reminder, earnings in the banking sector have increased across the board for the period between 2013 and 2016.

Investors need not run from every name with an increasing dividend-payout ratio, but they do need to ask themselves why they are investing. As General Electric Company has clearly shown the market, it is very possible to cut the dividend in a preventative manner before being backed into a corner. Only time will tell what Canadian companies will do once the economy slows down.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Goldsman has no position in any stock mentioned. 

More on Dividend Stocks

Dice engraved with the words buy and sell
Dividend Stocks

EQB Inc Stock: Buy, Sell, or Hold

EQB Inc (TSX:EQB) is Canada's fastest-growing bank.

Read more »

pipe metal texture inside
Dividend Stocks

Enbridge Stock: Buy, Sell, or Hold Today?

Enbridge is up 7% in the past six months. Are more gains on the way?

Read more »

money cash dividends
Dividend Stocks

The 2 Stocks Every Dividend Investor Should Own for Reliable Cash

Dividend stocks offering consistent and reliable returns can be a crucial asset in any portfolio, especially for income-producing dividend portfolios.

Read more »

grow dividends
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These top TSX dividend-growth stocks now offer yields above 7%.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold for Tax-Free Gains

Building a large, tax-free nest egg in your TFSA with growth stocks can give you more control over your tax…

Read more »

Women's fashion boutique Aritzia is a top stock to buy in September 2022.
Dividend Stocks

May Boycotts: Is Loblaw Stock in Trouble?

Even extreme fluctuations in consumer purchasing patterns may not impact a stock as aggressively as demoralizing actions like boycotts.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Want $2,000 in Annual Dividends? Invest $27,000 in These 3 Stocks

These three top dividend stocks could help earn a stable passive income.

Read more »

edit Sale sign, value, discount
Dividend Stocks

3 Absurdly Cheap Stocks to Buy and Hold for Years

Looking for some great stocks to buy for long-term growth? Here are three absurdly cheap stocks that are impossible to…

Read more »