Cutting or suspending dividends, even when it’s necessary, is rarely well-received by investors. The existing investors of a business that cuts its dividends experience a reduction in their dividend-based income.
A drop in the company valuation also accompanies it because an exodus of investors often follows dividend cuts. In extreme cases, the sell-out frenzy may reduce the company’s valuation to a fraction of its former self.
However, most of this pertains to the existing investor base, and new investors may perceive a company that recently cut its dividends a bit differently. One such company is Innergex (TSX: INE), and it might be worth looking into.
The dividend cut, reasons, and reaction
Earlier this year, Innergex announced it would cut its dividends by half. It paid about $0.18 by the end of 2023, and starting in 2024, the company is only paying about $0.09 per share.
One main reason behind the dividend cut was that they were becoming unsustainable, owing to the company’s weak finances. In some quarters, they ate up the company’s free cash flow, forcing it to rely on external financial assistance for its projects.
The reaction to the dividend cut hasn’t been as aggressive as the reaction many other companies have seen. The stock has dropped less than 3% into the year so far, and the most significant drop happened in February when the stock slumped 24% in 20 days. Overall, the bear market phase has been minimal.
Is Innergex still a buy?
For people who don’t already have Innergex in their portfolio, the stock may be worth considering for several reasons. Despite the dividend cut, the stock comes with a healthy enough yield of about 4%, and if the company gets back on its feet (financially), it may try to restore its dividends to their original level. This means you may experience rapid dividend growth in the next few years.
Another reason is that the company might improve its debt profile by funding most of its operations and growth from the now freed-up free cash flow. The third reason is its resilience. It’s one thing for a stock to retain its market value when the market or the sector dips (external hostile forces). However, retaining its value, despite cutting its payouts is resilience on another level.
Foolish takeaway
One thing to remember about the stock is that it has been in perpetual decline since its peak in Jan. 2021 and is currently trading at a discount of about 71% from that peak value. The dividend cut is more likely to prolong this slump. So, if you are anticipating quick capital appreciation, this small-cap stock may disappoint you.
