It goes against common sense to buy stocks when they cut their dividends, but this is a contrarian strategy which can lead to quick capital gains. Analysis is required to determine that the dividend cut is part of a corporate resctructuring plan which will work, i.e., actually reduce costs and increase future profitability. Timing for trade entry is crucial. Here are some recent examples.
On March 16, 2006, Con Agra Foods (CAG) reduced the dividend from .2725 to .18 per share as part of a plan to improve profitability. This disappointed many investors, since CAG had been one of the “dividend aristocrats” and they had increased their dividend annually for many years. There was an immediate and sharp selloff which bottomed at 18.42, but then the stock rose strongly and ended the year at 27.00 for a gain of 46%.
On February 7, 2006, General Motors reduced the dividend from 2.00 to 1.00 per share as part of a broad cost-cutting plan. The move had been widely anticipated, but the stock still stumbled for weeks before making a low in April at 18.53. GM ended 2006 at 30.72 for a gain of 65%.
On September 25, 2006, in the aftermath of the tainted spinach disaster, Chiquita Brands (CQB) suspended dividend payments and said it would consider selling its shipping business in an effort to cut debt. The stock plunged and made a low at 12.52 in early October, then rallied; CQB ended the year at 15.97, a gain of 28% in less than three months.