Weekly Dividend Cuts: The Pace Is Slowing

Cervus Equipment (TSX:CERV) was the sole company to announce a dividend cut last week. Is this industrial stock a buy today?

Economic Turbulence

Image source: Getty Images

The pace of dividend cuts and suspensions is happening at a record pace. Since the start of the pandemic, there have been more than 80 companies that  have either cut or suspended dividends. Leading the way are energy stocks. The sector is facing multiple headwinds, including pipeline constraints, low oil prices, and pandemic-mitigation efforts. 

Income investors are rightfully nervous — this is especially true of those who rely on stable and steady dividends in retirement. The good news is that dividend cuts and suspensions are beginning to slow. That being said, bad news continues to trickle in.

Last week, Cervus Equipment (TSX:CERV) was the only Canadian stock that joined the long list of cutters. On Wednesday, this industrial stock announced it was cutting the dividend, which means that the company’s mini two-year dividend-growth streak is at an end. 

Old New Percentage Date
Cervous Equipment  $   0.11 $   0.015 -86.36% 06/10/2020

A big dividend cut

The 86.36% dividend cut was significant. However, it isn’t the first time the company made such a move. During the last oil bear market, Cervus cut the dividend by approximately 70% . Given this, one would think the company’s fortunes are tied to the price of oil. Not so fast.

An industrial stock, Cervous is a global provider of John Deere, Peterbilt, JLG, Clark, Sellick and Doosan brands. It operates in three segments: Agriculture, Transportation, and Industrial. It has 63 dealer locations across Canada, Australia, and New Zealand.

The majority of business comes from the Agriculture segment, which accounted for approximately 60% of revenue in 2019. Although the company’s two cuts coincide with oil bear markets, it is only an indirect correlation.

Shares are undervalued

Cervus’s dividend cut is unlike the rest. The one constant message among all cutters thus far is that the move to cut or suspend the dividend is being made with the intention of preserving cash. 

Given the considerable uncertainty that exists, companies worldwide are also reducing capital expenditures and stopping share buybacks. All this is in the name of cash preservation. 

According to management, Cervus cut the dividend for another reason — to buy back shares. According to Peter Lacey, founder and chairman of the board: “In our view it would be a significant oversight not to capture the opportunity to buy Cervus shares at a substantial discount to tangible book value, especially in light of future growth aspirations communicated in our five-year strategic plan.”

As of writing, Cervus is trading at 0.5 times book value. This supports the company’s position that the share price is currently trading at a discount. The company has a strong balance sheet, and it generates consistent cash flow. 

Given this, the company is redirecting all cash from the dividend cut to repurchasing stock under the NCIB. Cervus is, in fact, returning the same amount of cash to shareholders. It is simply adopting a different strategy, one that it believes represents more effective use of cash. 

Is Cervus Equipment a buy today?

Re-directing cash to buy back shares of an undervalued company is a move that not many companies would make. In my opinion, it’s a smart move and worthy of investors’ praise. It shows foresight and that management is actively looking to make the best use of cash. 

The company is trading at a big discount to book value, and as an essential service, it continues to operate throughout the economic shutdown. Although income investors may sour on the company, value investors would do well to take a close look at Cervus Equipment.

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 Mat Litalien owns shares of Cervus Equipment.

More on Dividend Stocks

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

5 Canadian Stocks to Buy and Hold Forever in Your TFSA

Investing in stocks is not always about timing but about holding. Instead of looking at the price, look at the…

Read more »

Arrowings ascending on a chalkboard
Dividend Stocks

The 5.5% Dividend Stock Set to Dominate the TSX

TD Bank (TSX:TD) stock looks severely undervalued while the yield is around 5.5%.

Read more »

protect, safe, trust
Dividend Stocks

Passive Income: How to Earn Safe Dividends With Just $10,000

These three dividend stocks with resilient business models and a growing earnings base can provide durable passive income.

Read more »

Printing canadian dollar bills on a print machine
Dividend Stocks

How to Use Your TFSA to Earn $34,150 Per Year in Tax-Free Income

Canadian investors can hold undervalued TSX dividend stocks in a TFSA and benefit from outsized gains 2024 and beyond.

Read more »

Target. Stand out from the crowd
Dividend Stocks

3 Monthly-Paying Dividend Stocks That Are Screaming Buys Right Now

These three monthly-paying dividend stocks are excellent additions to your portfolios.

Read more »

Growing plant shoots on coins
Dividend Stocks

TFSA Set and Forget: 1 Dividend-Growth Superstar for the Long Run

Manulife Financial (TSX:MFC) stock is in the zone, with dividend hikes and big buybacks likely in the cards.

Read more »

little girl in pilot costume playing and dreaming of flying over the sky
Dividend Stocks

For a Shot at $6,228/Year in Passive Income, Buy 755 Shares of This TSX Stock

Looking for passive income? You'll need to look beyond only dividends. Which is why EIF stock could be one of…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

TFSA Investors: 2 Dividend Stocks I’d Buy and Hold Forever

These two stocks could provide long-term investors multi-year returns of more or less 10% per year

Read more »