For many investors, the choice is an easy one. Once there’s a dividend cut in their portfolio, that company is immediately banished. Shares are sold and that stock is to never be heard from again.
But I prefer a more nuanced view, especially today. The COVID-19 crisis has forced dozens of TSX stocks to cut, eliminate, or temporarily suspend dividends. We truly live in unprecedented times.
In fact, I’d argue that many of these dividend cut stocks are just temporarily down and that payouts will be boosted again once the economy returns to normal. This will likely take a year or two, but investors who get in today will be rewarded.
Let’s take a closer look at three such stocks, companies who cut dividends recently yet still have good long-term prospects.
It wasn’t very surprising to see Morguard REIT (TSX:MRT.UN) ultimately cut its dividend. It seems like everything is working against the stock right now.
Morguard REIT owns a portfolio of office, retail, and industrial buildings, with holdings in B.C., Alberta, Saskatchewan, Manitoba, and Ontario. The trust has significant exposure to Alberta, something the market doesn’t like right now.
And one of its major office tenants in Calgary — an energy company, naturally — is on the verge of bankruptcy. Another one of its major assets is a collection of regional malls, which are all closed down today.
However, it’s really quite amazing how cheap this stock is. The stock’s current market cap is $322 million with a net asset value of $1.4 billion. And remember, it earned $1.50 per share in funds from operations as recently as 2019. Shares trade at just over $5 each today at writing. That’s a pretty compelling value.
Even after the 50% dividend cut, Morguard REIT still yields more than 8%.
Folks have been speculating about a potential Inter Pipeline (TSX:IPL) dividend cut for years now, saying there was no way the company could afford to pay shareholders at the same time as it shoveled cash toward its big new project, the Heartland Petrochemical Complex.
Something had to give, and COVID-19 was the justification for the dividend cut.
I’m the first to admit the company’s prospects don’t look great over the near-term. But once business gets back to normal, Inter Pipeline has all sorts of solid assets that should generate significant cash flow. Its oil sands pipelines will continue to be steady performers.
After all, it’s hard to shut down oil sands production. Its natural gas pipelines and fuel storage tanks should also be solid assets, and Heartland should still start contributing to the bottom line when it’s completed in 2021.
Inter Pipeline shares currently trade at approximately $11 each. I think the stock could easily double over the next two or three years, and investors who get in today are treated to a 4.1% dividend yield while they wait.
MTY Food Group
MTY Food Group (TSX:MTY) owns dozens of different fast food brands, most of which are staples at mall food courts across North America. This was a pretty solid business to be in, with plenty of growth potential and good economics.
Then COVID-19 came and all the malls shut down. Naturally, MTY’s stock price fell accordingly, and is now down more than 50%.
But it’s not all bad news, however. MTY made some prudent moves to conserve cash, including suspending its dividend. That should translate into some interesting acquisition possibilities when all this is over.
And the company’s lean head office should give it more security than many of its competitors. I also predict stellar third quarter numbers as social isolating folks rush back out to restaurants.
The bottom line on these dividend cut stocks
A dividend cut isn’t the end of the world. In fact, it can be a great buying opportunity. History has proven it countless times.
But investors must be careful, because there are also many examples of a dividend cut marking the beginning of the end of a formerly great business.
As long as we stick with solid dividend cut stocks like Morguard REIT, Inter Pipeline, and MTY Food Group, investors should be fine.
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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 Nelson Smith owns shares of INTER PIPELINE LTD and MORGUARD UN. The Motley Fool owns shares of and recommends MTY Food Group.