EP65: How to Handle Dividend Cuts

In this episode, I show you how to handle and avoid dividend cuts, using the most recent example of an ex-dividend aristocrat Walgreens.

I cover the following topics in this episode:
- What are dividends?
- Who is Walgreens (WBA)?
- Walgreens dividend history
- Walgreens dividend cut
- Why cut the dividend?
- What to do now?
- My story of GE and TC Energy
- Early warning signs of a dividend cut
- What are dividend aristocrats?
- The importance of diversification

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Transcript

Speaker 1: 0:00

In this episode we're going to look at what to do when a company reduces its dividend. Specifically, we'll look at a recent example with Walgreens. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend podcast. In this episode we're going to cover five topics. We'll start with a little bit of information about Walgreens, the company itself, then we'll look at the company's dividend history. Then we're going to look at the most recent dividend cut that the company made. And then what do we do now? So if you own the stock, should you buy more shares, should you sell the shares you already own or should you skip it? So we're going to talk all about that in section number four. And then the last topic in this episode is the importance of diversification. Now, quick reminder, especially for those of you that are new to this channel I'm just going to spend a minute very quickly on dividends right before we jump into the rest of this episode. So dividends are essentially the profits that a company shares with you, the shareholder. So in this example on the screen, if a company is paying a dividend of $1 per share and you own a thousand shares, you will receive $1,000 every year for as long as you own those shares and as long as the company continues to pay the dividend, regardless of the stock price. The stock prices go up and down all the time, but as long as you hold on to those shares and the company pays a dividend of $1 per share in this example, you'll receive $1,000 for as long as you own those shares and as long as the company continues to pay the dividend. Now the dividends are deposited directly into your trading account as cash, so you can spend the money if you wish, or you can reinvest it into other stocks that pay dividends as well. So it's a way to compound your dividend growth. Now we have students who are today earning $500 a year in dividends. Some of them are making $5,000 a year in dividends. Some of them are making $20,000, $60,000, $70,000 a year in dividend income. So when a company announces a dividend reduction, that is something that we, as dividend investors, take very seriously and that's what we're going to talk about in today's episode.

Speaker 1: 2:35

So let's start with our first topic the company itself Walgreens. So let's talk a little bit about the company. The official name is Walgreens Boots Alliance, but many of you will recognize the logos on the screen. If you're in the US. You're going to recognize the Walgreens logo. This is a pharmacy and they own many, many locations in the US. If you're in the UK, you'll recognize the logo and they go by the name of Boots. The company itself was founded in 1909 and is headquartered in Deerfield, illinois. In 2014, boots and Walgreens merged to form the new company that we have today. The company has today 330,000 employees and it operates as a healthcare, pharmacy and retail company in the United States, in the United Kingdom, germany and internationally. The company today has a market cap of 19.7 billion dollars and it is one of the largest retail pharmacy chains in the US, with over 8,500 locations. Almost 75 percent three-quarters of Americans live within five miles of a Walgreens location, so this is certainly a very large company. Overall, worldwide, the company has 13,000 locations.

Speaker 1: 4:11

So now let's move on, and we're going to look at the dividend history of Walgreens. So the company has paid a dividend every year since 1933. So that's 91 years of consistently paying dividends. That's an impressive track record. And, even better, the company has had 47 years of consecutive dividend increases every single year, year after year. Walgreens was part of the list of dividend aristocrats, and I'm going to talk about the aristocrats a little later in this episode. So this is an impressive track record, and so this is a company that you look at and you would have a high degree of confidence that they're going to continue to pay a dividend in the future and hopefully increase it in the future.

Speaker 1: 5:07

Dividend increases are generally a positive sign. When a company announces that they're going to increase the dividend, it means that they've done their homework, they've looked at their balance sheet, they've looked at their financial statements how much revenue they expect to earn, not just in the current year, but in future years and then they look at how much is the dividend today and how much can we continue to pay the dividend in the future, because nobody wants to cut their dividend or eliminate it, because whenever they do that, the stock price drops immediately. We saw that in March of 2020 when COVID hit Boeing, general Motors, disney eliminated the dividend altogether and immediately their stock prices tanked. So a positive sign is when a company increases its dividend or announces a dividend increase. So and over time and we've seen this over and over again, I've been doing this for over 24 years in the long term, every time a company increases the dividend, that's more money in your pocket. But it also helps to increase the stock price, because when the dividend goes up, the dividend yield goes up and then it attracts more investors to the company and, just because of supply and demand, if there's more people interested in the stock, then the stock price is going to come up. So that's a positive sign when the dividend is increased. But what we're talking about today is a dividend decrease. So that takes us to the next topic in this video, specifically Walgreens announcing a dividend cut.

Speaker 1: 6:47

Now on the screen here. I'm just going to go back just a few years we're going to look at. You can see 2017, walgreens was paying a dividend of $1.52. The following year, they increased the dividend to $1.64, then they increased it again. You can see the dividend going up consistently and, as I mentioned a couple of minutes ago, they've had 47 years of consecutive dividend increases. But then you'll notice last year, in 2023, the annual dividend was $1.92, and now it's projected this year to be just $1. Now, as of this recording, at the beginning of 2024, the year isn't over yet, so the company could announce another dividend cut or they could increase the dividend. So we really don't know just yet what the rest of the year is going to look like for Walgreens.

Speaker 1: 7:41

So let's look at specifically the quarterly dividend, because that's what we can look at today. So the previous quarterly dividend was $0.48 a share, because the dividend just paid every quarter in this case with Walgreens and on January 4th 2024, the company announced that its new quarterly dividend would only be $0.25. So that is a reduction of 48%. So if you own this stock, your dividend income has now just dropped by 48% and that's a significant drop. And naturally, as I mentioned before, look at what happened to the stock price and you can see on January 4th and you can see it on the chart up on the screen on January 4th, the stock price dropped by approximately $2 a share. Now, on the 5th and the 6th and the 8th sorry the stock price went up a little bit, but now it's come back down again. So, as of this recording, the stock price is down again.

Speaker 1: 8:53

So this is nothing new. We see this all the time. Every time a company announces a dividend cut, the stock price is going to drop. Why? Because the yield is dropping. The dividend income that you would be getting from this company has dropped. So investors some investors will sell their shares, so the stock price drops, but why did the company cut its dividend?

Speaker 1: 9:21

So for that we're going to go to the CEO of the company, tim Wentworth, and I'm going to read to you his comments regarding this recent dividend announcement. So Tim says since the start of my tenure with WBA, we have been evaluating our options across our strategies and operations, including those related to our capital allocation. We have made the difficult decision to reduce our quarterly dividend payment to $0.25a share to strengthen our long-term balance sheet and cash position. This action reinforces our goal of increasing cash flow while freeing up capital to invest in sustainable growth initiatives in our pharmacy and healthcare businesses, which we believe will ultimately improve shareholder value. Okay, so end quote. So that was the quote from the CEO of Tim Wentworth.

Speaker 1: 10:23

Ceo of Walgreens. Basically, what the CEO is saying here is that the company decided to cut the dividend to improve its cash flow. So it looks like the company is in some type of financial trouble where they don't have enough cash to pay the shareholders. So they're going to keep that cash for themselves, reinvest it into the business to grow their business. So ultimately, what he says in the last sentence there is to improve shareholder value at the end of the day. So how are you going to do that? You got to get the share price to come back up again. Hopefully, increasing the dividend again will also help to bring the share price up again. So the motivation seems fine. The company is doing what it can, it's cutting costs and it's doing what it can to be in a better financial situation in the future. So then, what do you do now For those of you who have shares in Walgreens or are considering buying shares in Walgreens so that's our next topic in this episode Do you buy, sell, hold or skip this company altogether?

Speaker 1: 11:37

Now I'm not going to be able to get into specifics, specifics regarding your personal situation. I can't do that. I don't know who you are, how big your investments are, how long you've been investing in the company, so we can't get into specifics. I will have a discussion in this episode and provide you some guidelines, some ideas, and help you to make your own decision. Now there's many factors to consider here. Number one is going to be your own risk tolerance. Do you hang on to the shares? What if they continue to drop? What if they cut the dividend again? Or what if now is a good time to buy because the stock price is low, the dividend yield is good, maybe the stock has nowhere to go but up from here. So that's going to all depend on your own risk tolerance. Are you able to sleep at night with the decisions, the investing decisions, that you've made?

Speaker 1: 12:39

Number two factor to consider is are you a beginner, are you an intermediate or experienced investor? Do you have a portfolio of maybe five stocks or do you have a portfolio of 45 stocks? So that's all going to depend. And if you, you know, did you just start investing recently or have you been investing for the last 25 years? And if, as an experienced investor, I've seen this before. I've seen it with other companies where the dividend gets cut. But based on my experience, I'm now able to make better decisions going forward. And then the other things to consider are you know how many other dividend stocks do you own? Is this the only stock that you have that pays dividends, or do you have other ones?

Speaker 1: 13:22

So, even though the dividend has gone down 48% for Walgreens, is it negatively going to affect your overall portfolio or not, because the other companies might have increased their dividend to offset, you know, the 48% decrease with Walgreens? How long have you held the shares. So anybody who's bought the shares 10, 15 years ago is still making money, right, they would have collected all the dividends over the last 10, 15 years and the share price was much lower 10, 15 years ago than it is today. So they're still. They're doing fine, they're still making money. But if you just bought it a year ago, six months ago, it's going to be a completely different story. And the other factor to consider is how much you have invested in WBA. Is it $500 or is it $50,000 in this company? So that's also going to weigh on your decision whether to buy or sell.

Speaker 1: 14:22

And there are a couple of unknowns here. I've already mentioned them before, but let's go through them again. So there's five of them here that I listed on the screen. Will the dividend get reduced again? We don't know. That's an unknown. Will the dividend get eliminated completely altogether this year? We don't know that either. Or will the dividend go up, right? So that's an unknown. How will the stock price react? Is the price going to keep going down or is the price going to start to come up now that the company says they're positioning themselves to be in a better financial situation? So we don't know if the price is going to go up or down. Will the company turn around, be successful? Because that's what the executive team at Walgreens is hoping and that's what they're working towards is to turn this around and make it a financially healthy company. But will it take six months? Will it take a year? Will it take two years? We don't know. So there's a whole bunch of unknowns here.

Speaker 1: 15:25

So you're watching this episode, you're listening to this episode, because we said we were going to talk about so what do you do now? That's the question. So I'm going to keep it general. Again, it's not going to be specific to your needs. I'm going to keep it general. So here are some suggestions.

Speaker 1: 15:44

So if you don't own the company right now, I would skip it for now, just because when we invest, we want to minimize our risk as much as possible. So here's a company that has just cut their dividend. Their earnings are negative and we don't know what's going to happen in the next six months to a year. Is the price going to go down? Are they going to cut the dividend again? We just don't know. Versus a company that has not cut its dividend, some other company that has increased its dividend? That's probably a safer choice than what's happening with Walgreens today. So we want to make the safer choice out of the two. So if you don't own it, skip it for now. That's probably a good general guideline for most people.

Speaker 1: 16:33

Now the current stock price today, as of this recording, is $22.90. The current dividend yield is 4.4%. So if you bought the shares for less than $22.90, so maybe you were lucky and you bought some when the stock price was at $20 or at $21. So if you bought it for less than what it's trading at today, you may consider selling because you're not going to lose any money. You're probably just going to break even, maybe even a little bit of a profit if you bought it at $20 and it's trading at $22. Sorry, and if it's trading at $22 today, you're not going to lose any money on that. So that would be a quick decision. You're not going to lose anything. You may consider selling Again to avoid any future dividend cuts. That may or may not happen, we don't know. Again, it's all about minimizing your risk.

Speaker 1: 17:34

Now I've gotten some questions. I've gotten some emails from people who bought the stock when it was very high. They bought it at $40 a share or even $50 a share back in 2022. So for those folks, they want to know what they should be doing now. So what do you do so in this situation? You know, personally I hate to lose money. I just hate it. So if you're in that ballpark and you feel the same way, you may consider just holding it Now.

Speaker 1: 18:12

Hopefully, this is more for experienced investors, investors who have been doing this for many, many years. You already have a good size portfolio. You're already generating dividend income from other dividends and those dividends have gone up. You may consider holding because if the company can turn this business around, then the stock price will eventually come back up and the dividend, hopefully, will go up again. And I'm going to show you an example right after this. So hang in there. Let's look at the other example I'm going to show you right after this. But so if you bought it at a high price, you may consider holding.

Speaker 1: 18:51

The other option is you may want to sell, but if you do, you are going to solidify those losses. That's entirely up to you. You might be thinking, well, I can sell it, take those losses Now. I can put that into something else that's going to provide me with a better yield and we have higher confidence that their dividend will go up over time. So you may want to do that.

Speaker 1: 19:16

So it's a bit of a judgment call. I already identified the factors that might affect your decision and I've identified the unknowns that are out there. So I'm sorry, I can't be more specific. And you also want to consider you know your if you bought it at $50, two years ago or five years ago at a high price and now it's at 22,. You also want to consider the dividends you would have accumulated over those years, let's say over the last five years. So how much did you get in dividends? So just don't look at the stock price that you bought it at and the stock price today. Consider the dividends that you've had over the last four or five years and then take a look at what your losses would actually be if you were to sell the stock today. So that's why it's going to be very the decision is going to be very specific to you and you alone. Okay, so I want to share with you two personal stories of mine that may help sway your decision, or maybe not, because both of these stories are complete opposites of each other. So General Electric is one. So I still own those shares today.

Speaker 1: 20:33

I've had them for many, many, many years and over the last couple of years the company has had a number of dividend cuts. I've kind of lost track. I think there was three cuts, maybe four, but I know three for sure dividend cuts. So the company cut the dividend the first time and I held on to it and I said, you know, I think it'll, they can turn this around, the dividend will come back. This is a large corporation, it's not going anywhere, it'll be fine.

Speaker 1: 21:04

And then they made another dividend cut and then the stock price dropped even more and then it got into a position where, like I said before, personally I hate to lose money. So I said, okay, well, I'll just hang on to it. But then, after the third cut, the price dropped even more and now I'm not interested in selling it now and again, it's not a huge investment. I forget the exact number, maybe it was $2,000 total in General Electric. So at this point it's it's gone down too far that I'm just going to hang on to it. It doesn't negatively affect my portfolio. I have a lot of other dividend stocks that grow their dividend every year. So General Electric did not have a happy ending Now it could. Maybe in the next five, six, 10 years maybe it'll come back up again, but as of today it's it's. It has not been a good performing stock for me.

Speaker 1: 22:04

On the other hand, tc Energy is completely the opposite, and TC Energy also cut their dividend in 2000. And then you can see it up on the screen here right. So now I'm not going really too far back. So on the screen you can see in 1994, the company was paying an annual dividend of $0.94 a share. The year after that they increased the dividend to $1.02. And then after that, the year after that, the dividend went up again.

Speaker 1: 22:34

But in 1998, and maybe that would have been a yellow flag in 1998, the dividend stayed the same. So the company didn't increase it, they just kept it the same. But in 1999, they reduced the dividend, so it went from $1.18 a share to $1.12 a share. And then in 2000, they reduced the dividend again. So there was two dividend cuts. And so in 2000, the dividend was 80 cents a share. So that scared away a lot of investors.

Speaker 1: 23:06

The stock price came down quite a bit and I happened to buy shares in TC Energy in 2000, after the second dividend cut was made and again it wasn't a huge investment. It was $2,479 total. But you can see here the company has increased its dividend every single year since 2000. So we're looking at 24 years of consecutive dividend increases after those last two cuts that they made. So here the company was able to turn itself around financially and then they started increasing the dividend. So in 2000, the dividend was 80 cents a share. The annual dividend and as of this recording it is $3.72 a share and, if you recall, I invested $2,479 in this company. This company has now provided me with over $8,700 in dividends and you can see that up on the screen here. So this was a success story. So there you have it. I've given you kind of both sides of the coin general electric and TC energy. So where is Walgreens going to fall into this? Is it going to be like GE or is it going to be like TC energy? So nobody knows.

Speaker 1: 24:31

But let's just get back to our specific example that we're discussing in today's episode with Walgreens. So some of you want to know were there any early warning signs? Was there something that could have told us that maybe a dividend cut was coming? So maybe we can learn from this experience and we can apply it to the stocks that we own today. And so the answer is yes. There was some early warning signs and we can see here up on the screen.

Speaker 1: 25:03

There was three major signs here Walgreens EPS, which is the earnings per share, was actually negative in three out of the last five quarters. So that should be a yellow flag when the company is losing money. Sometimes it's fine to see the earnings drop, like one time in a year, and then it goes back up again, because we're always looking at the last 20 years. We want to see the earnings growing over a long period of time, so one or two dips in the earnings is fine. But in this case, if you look at the last five quarters, you can see that the earnings were negative at three out of the last five quarters. So that's pretty bad. The earnings were down, and what happened is, when the earnings come down, the payout ratio goes over 100%, and for those of you that are interested, I have an entire episode talking about payout ratio. That's an episode two, so you can go ahead and watch that to learn more about the payout ratio itself. So the payout ratio being over 100% was another yellow flag like something is going on here. The company is not making enough money to pay the shareholders, so something has to happen to the dividend. And then, finally, the last thing was, if you look at the previous year, 2023, there was no increase in the quarterly dividend. So here was a company that had a dividend streak of 47 years of consecutive dividend increases, but in 2023, they did not increase the dividend at all, the quarterly dividend. So if you look at the last four quarters, the dividend remained at 48 cents a share. So that would have been another yellow flag. So these are the three things to look for, even in stocks that you own today, because it'll give you some guidance and some early warning signs that maybe a dividend reduction is coming.

Speaker 1: 27:07

Now, there is one silver lining in all of this, okay, and that has to do with the dividend aristocrats. So, for those of you not familiar with the dividend aristocrats, it's a list of companies and there's only two things that you need to meet the requirements to get into this list. So, number one you need to be part of the SNMP 500 index. So they're US companies. If you're part of the SNMP 500 index, that gets you one step of the way there. The other thing is you must have at least 25 years of consecutive dividend increases. So if you meet those two requirements, you are then considered a dividend aristocrat In 2023, there were 68 companies in that list.

Speaker 1: 27:57

Now the good news is, 64 out of the 68 companies increased their dividends. Three companies kept the dividend unchanged and one of them cut the dividend, and that was Walgreens. So that's not bad. The majority of companies that are in the dividend aristocrat list increased their dividends. In fact, it was 64 out of the 68 companies in the list grew their dividend, but all of the media attention always falls on the one or few companies that cut their dividend altogether.

Speaker 1: 28:35

So this brings us to the last topic in this episode, and it's the importance of diversification. So the key here is not to put all your eggs in one basket, so diversification is the key. Over time, you want to be able to build your portfolio consisting of companies in all of these 11 sectors you see up on the screen here Access, energy materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, communication services, utilities and real estate. Now, this is not going to happen overnight. You can't do this right away. It takes a few years to build a well diversified portfolio. So you want to diversify across different sectors so that, in case one sector is down and it's dragging all of the stocks down, it doesn't negatively affect your portfolio. And you also want to make sure that you're investing in other dividend stocks so that if you do have a company which in this case we've seen it's rare, but you do have a company that cuts its dividend again, it's not going to negatively affect your overall dividend income that's being generated by the portfolio.

Speaker 1: 30:00

I've been doing this for over 24 years and I can tell you that my dividend income has gone up every single year, and that's including 2008, 2009. We had the financial crisis, including COVID, in March of 2020. The dividend income has gone up every single year, so diversification is going to help you to lower your risk. So does this mean that you should go out today and just buy one dividend stock out of each of these 11 sectors? And the answer is no. You want to make sure that you're buying not just any dividend stock, but that it's a high quality dividend stock and not just at any price. You want to make sure that it's priced low. So how do you know, when you're looking at a company, if it's a high quality company, and how do you know that it's priced low? So for that I've created what I call the 12 rules of simply investing. This becomes your checklist. If a company fails even one rule, skip it, move on to something else. And this list, this 12 rules, are going to help you to lower your risk and help you make better investing decisions. So let's take a look at them. They're up on the screen here.

Speaker 1: 31:18

Rule number one is do you understand how the company is making money? If not, skip it, move on to something else. 20 years from now, will people still need its product and services? That's rule number two. Rule number three does the company have a low cost competitive advantage? Rule number four is it recession proof? Rule number five is it profitable? And we talked about earnings in this episode. Negative earnings is not good. Number six does the company grow its dividend? And so we talked about dividend cuts in this episode as well. Rule number seven can the company afford to pay the dividend? And rule number eight is the debt less than 70%? And rule number nine avoid any company with a recent dividend cut. So there you go. That answers the question of what to do with Walgreens today, especially if you're just starting to build your dividend portfolio. Rule number 10, does the company buy back its own shares? Rule number 11 is the stock priced low. So we look at the P-E ratio, we look at the P-B ratio and then we also look at the current dividend yield and compare it to the company's 20-year average dividend yield. And then rule number 12, keep your emotions out of investing.

Speaker 1: 32:30

So, for those of you that are interested, I've created the Simply Investing course. It's a self-paced online course, it's in 12 modules and it's going to help you become a better and successful investor. In module one, we start with the investing basics. Module two, we cover the 12 rules of Simply Investing in detail, with real life examples. In module three, you learn how to apply the 12 rules yourself. Module four we look at the Simply Investing platform. In module five, you learn how to place your first stock order if you've never done it before.

Speaker 1: 33:08

Module six building and tracking your portfolio. Module seven when to sell. Module eight reducing your fees and risk, hopefully when it comes to mutual funds, index funds and ETFs. Module nine your action plan to getting started immediately. And in module 10, I answer your most frequently asked questions. So we also have the Simply Investing platform, which is an online web app. It applies the rules to over 6,000 companies in the US and in Canada every single day, so you can immediately see which companies to avoid, the ones that are overvalued or priced high, and which ones to consider. So if you're interested, you may want to write down the coupon code SAVE10SAVE10. Save10 is going to save you 10% off of our course and the platform as well. If you enjoyed today's episode, be sure to hit the subscribe button. Hit the like button as well. We have new episodes out every week and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.