If oil prices hadn’t started on their downward spiral in mid-2014, shareholders would have seen almost $7.5 billion more income than they will see this year. It’s a startling loss that is gaining even further momentum as companies slash dividends to stay afloat. So if you’re in it for the short-term dividends, this is no longer the game for you, but if you’re a smart, long-term investor, these dividend cuts should be welcomed.
According to Bloomberg, Kinder Morgan shareholders have lost $3.44 billion in dividends, followed by the second biggest losses among ConocoPhillips shareholders, at $2.42 billion. Anadarko Petroleum Corp. shareholders have lost $447 million, while Crescent Point shareholders have lost $318 million and Devon Energy shareholders have lost $276 million.
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Dividends have always been, and will remain, an integral part of smart investing; nevertheless, at crucial times investors should consider non-payment of dividends as a positive step that benefits shareholders.
During the 2007 financial crisis, 57 percent of companies in the developed markets reduced or cancelled their dividends altogether to weather the storm. In the U.S. alone, 62 companies in the Standard & Poor's 500 index announced a whopping $41 billion in dividend cuts in 2008, which was followed by $30 billion more in the first two months of 2009. Interestingly, as the economy and the markets recovered, dividends saw a double-digit median increase from 2010 to 2015.
A little patience goes a long way in the dividends game.
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As part owners of the business, the shareholders expect the company to act for their benefit in the long-term. A sign of a good management is taking measures to spend money wisely while keeping an eye on getting the maximum bang for the buck. The current oil crisis will lead to more mergers and acquisitions (M&A) in 2016, compared to 2015. Strong companies will be able to buy good assets due to distress selling by others with a weaker balance sheet.
A good management should keep reserve cash to benefit from the next available opportunity, instead of handing cash over to shareholders. Maintaining dividends during a crisis can either be a sign of a very strong company with an ironclad, impregnable balance sheet, or a weak, short-sighted management.
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Chances are that a strong company maintaining its dividend record during troubled times will quote at high valuations. Whereas, a smart investor should learn from the great Warren Buffett, who opines, “The best thing that happens to us is when a great company gets into temporary trouble . . . We want to buy them when they're on the operating table."
Investors in the oil and gas sector should not necessarily be perturbed by the dividend cuts, but they should keep track of management plans to use the money saved by these cuts. If management fails to add value for investors and uses money saved through dividend cuts to recklessly increase salaries and bonuses, it’s time to run for the door. But if we’re looking at long-term value creation here, wait it out. Investors could see a nice win when the time is right, as in the aftermath of the financial crisis.
By Rakesh Upadhyay for Oilprice.com
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Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.