Optimism is returning to the markets. In June, the S&P/TSX Index Composite index gained 2.37%. It also marks the third consecutive month of gains after March’s correction. Along with this good news, the pace of dividend cuts is also beginning to slow. This is good news for those currently invested in income stocks.
Through the end of May, income investors were nervous as the TSX Index saw a record pace of dividend cuts and suspensions. 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.
In June, there were just three TSX-list income stocks with announced a dividend cut — by far the fewest monthly cuts/suspensions since the pandemic began.
|Canwel Building Materials Group (TSX:CWX)||$ 0.14||$0.12||-14.29%||06/15/2020|
|Rocky Mountain Dealerships (TSX:RME)||$0.06||$0.015||-87.76%||06/16/2020|
|Cervus Equipment (TSX:CERV)||$0.11||$0.015||-86.36%||06/10/2020|
A steep dividend cut
True to its word, Rocky Mountain Dealerships announced that it was cutting the dividend to $0.015 per share, an 87.76% cut. The move should not come as a surprise to investors.
Back in April, the company said it would slash the dividend from $0.1225 per share to “no more than $0.06,” which would have resulted in a 51.02% cut at minimum. The cut was pretty significant and will generate cash savings of approximately $8.3-million on an annualized basis.
Where does the company go from here? Over the past year, the company’s share price is down by approximately 35%. It doesn’t appear that the short-term outlook is any better, however. The cut was made in response to “emerging data and trends in both the agriculture equipment market and the broader economy being affected by global economic uncertainties.”
It appears a rebound is still a ways away for this income stock.
An industry first
Canwel Building Materials became the first to announce a dividend cut in the Construction and Home Building industry. On the bright site, the 14.29% cut is on the lower end of the cuts we’ve seen this year. The cut will not take place until the third quarter.
The move is somewhat surprising when one considers that this income stock experienced a 9% increase in sales from January through May. Despite the current pandemic, the company’s business model is proving to be quite resilient.
It seems the reduction in the third quarter dividend is being made out of an abundance of caution. There currently exists considerable uncertainty, and Canwel’s Board believes it is a “prudent measure to enhance (their) capital and financial flexibility.”
A cut unlike the others
Cervous Equipment’s hefty ~87% cut is an interesting one. Typically, dividend cuts and suspensions are made with one goal in mind: to preserve cash. Not so for Cervous.
Instead, management felt that buying back stock was a better use of cash. It believes that the share price is materially undervalued, and it will redeploy the cash saved toward repurchasing shares. In other words, it will be returning the same level of cash to shareholders.
The company has actually been performing decently in 2020. This income stock’s price is down by just 14.29%, which is better than most in the industry. However, Cervous’ stock has been under pressure for the better part of the past year (-43.02%).
It looks like Cervous is being opportunistic, and the move is not a reflection of a deterioration of cash flows.
Are these income stocks a buy today?
Canwel is one of the better-performing income stocks on the dividend cut list. It is trading at a decent 19 times earnings and only 1.06 times book value. Although disappointing, the dividend cut should be a non-event.
For its part, Cervous’ dividend cut is a positive development. All too often, companies buy back shares are elevated prices. To see a company make such a move, is a clear vote of confidence by management.
Finally, while Rocky Mountain Dealership may look attractive, as a micro-cap, it’s facing considerable headwinds. In fact, it would not be surprising if another cut or dividend suspension was on the way.
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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 Mat Litalien owns shares of Cervus Equipment.