8min read
PREVIOUS ARTICLE Is it time to sell these stock... NEXT ARTICLE Contrarian picks in education ...

With apologies to Stephen King for adapting the title of one of his short stories, the return of dividend payments from formerly floundering companies is a fact of life of which investors should take note.  
In the low interest rate environment in which we find ourselves dividend paying stocks continue to explode in popularity across the globe.  While some investors select their dividend targets based on yield alone, most look to the advice of market analysts and experts to guide their choices.
One bit of advice found in virtually every list of the “do’s and don’ts” of dividend investing is to avoid companies whose ability to maintain dividend payments is questionable.  The reasons vary, but the core advice is to look for stocks with cash flow growth potential based on market or company specific conditions.
This advice can make sense for investors with short to medium term outlooks.  If your time frame is a few years, months, or even days, a company that has cancelled or is likely to cancel its dividends is not for you.
However, for investors with a longer time horizon and the patience to wait for rewards, the case could be made for actively looking for stocks reducing or eliminating dividend payments due largely to macro-economic, not company specific, conditions. 
Although this view flies in the face of conventional wisdom about investing in dividend stocks, one could make a contrarian argument beginning with the recent announcement from Australia’s premier gold miner, Newcrest Mining (NCM), that the company would once again begin paying dividends. Back in February speculation began that renewed dividends were a possibility and on 16 August the company announced its first dividend payment since February of 2013.  On 15 August Newcrest reported financial results including the news the company would pay a dividend of US$0.075 per share.  This despite a 12% profit decline attributed to the company’s hedging policy that led to selling gold at prices lower than current market levels. In addition, Newcrest switched to reporting in US dollars.  
The upside to the report was the 11% drop in operating costs and a 12% reduction in debt.  The Half Year results reported in February were similar, showing drops in profit accompanied by improvements in cost reduction and lowered debt. 
In the opinion of analysts, dividend payments from NCM have not only come back, but also are expected to grow close to 68% over the next two years, with dividends ballooning to US$0.283 per share by FY 2018.
Companies pay dividends to shareholders not out of some altruistic instinct, but rather to attract more investors to buy the stock, driving up the price.  Once the dividends go down or go away so do many investors, which drives down the price.  The following five year price movement chart for NCM shows the predictable pattern.

In late 2011 Newcrest was still benefiting from the massive bull-run in the price of gold.  Like most miners Newcrest paid little attention to cost controls and some would argue spent money like a pack of wild dogs in search of a meal, searching for new sources of production.  The same could be said of iron ore miners.  The gold price began its decline in 2013; leading to Newcrest’s eliminating dividends; leading to a steep drop in the share price through the remainder of the year.  Prior to the cancellation of its final dividend on 12 August 2013, NCM was trading around $12 per share, already down from the closing price of $22.07 on 18 March, the last day the company paid a dividend.  The price kept dropping and closed the year at $7.77.  The recovery began in early 2014 and has continued, despite weakness in the price of gold.  Here is a five year price chart tracking movements in the gold price.

While miners can influence the price of a commodity by how much of it they produce, they cannot directly influence demand, which is more a macro-economic factor.  What companies can control is how much it costs to produce their commodity and the capital expenditures they are undergoing to guarantee continued production long into the future.
One could argue that the gradual rise in the share price of major gold miners while gold remained uncertain was due to the rigorous efforts to curtail costs and shed non-producing assets. That trend accelerated rapidly so far in 2016.  The following chart compares the performance of two ETF’s – the SPDR GLD of gold bullion and GDX – the VanEck Vectors Gold Miners Index.

Looking back at the five year chart for the price of gold suggests the fact the miners’ dividend payments were in jeopardy came as no surprise.  Investors bailed out of companies like Newcrest in the belief dividends would go away or get cut drastically with no certainty they would come back.  

However, investors operating under the belief there is no certainty in the markets may have seen a promising longer term reward here.  In short, investors who doubted gold would drop far below $1,000, as some experts predicted, and believed lower operating costs and an eventual recovery in the price of gold would bring back dividends may have taken the plunge.  NCM stock could have been bought in the dog days of 2013 for somewhere between $12 and $8 per share.  Those who timed the market perfectly and bought in for $7.77 on the last day of 2013 have seen 200% in price appreciation and now are ready to begin adding dividends to their returns. At an entry price of $12 the gains amount to %94.5, based on a 25 August closing price for NCM of $23.34. Year to date, NCM stock is up about 107%, and that before the dividends came back.
Qantas Airways (QAN) is another stock poised to bring back regular dividends following a dry spell that began in 2009.  On March 3 2009 the company paid its shareholders a dividend of $0.085 per share while the share price hovered around $1.50.  The price of oil collapsed after the GFC and the Qantas share price began to rise as oil prices recovered.  Here is a price movement chart for QAN followed by a 10 year chart for oil price performance. 

Comparing the two charts would suggest the troubles at Qantas could not be totally attributed to the price of oil, the industry’s biggest single expense.  Comparing Qantas to rival Virgin Atlantic Holdings (VAH) over the past five years suggests the failure of Qantas to respond to discounted air fares as at least one possible cause.  Here is the chart.

Qantas launched a branded discount airline, JetStar, in 2004, a relaunch of an earlier effort. Competition from Virgin and other discount carriers continued to plague Qantas. By 2011 the Qantas CEO was openly speculating the airline could not survive.  A multi-phase turnaround effort was launched, beginning with a vigorous analysis and review of every aspect of how and where Qantas operated.  By January investors began to acknowledge the company’s improvement efforts.  In August 2016 Qantas reported its best financial results ever, and announced both a reinstatement of dividend payments and a share buyback. Profit after tax went from $557 million in FY 2015 to $1.03 billion, an 85% increase. Revenues were up 9%
Three years ago, almost to the day, investors willing to bet on the company’s turnaround efforts and the return of dividend payments could have bought a share of QAN for $1.35.  As of 25 August the share price stood at $3.36, an increase of 148% over that period.
Despite its impressive turnaround Qantas remains a riskier stock than most.  The price of oil has risen in 2016, driving down the Qantas share price.  Domestic travel is suffering and competition is substantial. Airline stocks are notoriously subject to issues beyond their control and even investing whales like Warren Buffet of the US will not touch airline stocks under any conditions.  However, Qantas has a Forward P/E of 5.89 and a 5 Year Expected P/EG (price to earnings growth) of 0.29 and benefits from international travelers attracted by the low AUD.
There are other ASX stocks in the dividend doldrums as a result of low oil prices that may seem less risky than Qantas.  In February of this year Origin Energy (ORG) warned its shareholders they could be facing the loss of their dividend payments due to the price of oil.  Although the company’s principal business is energy retailing, Origin has enough assets in the oil patch to impact the company’s financials.  Full Year results reported on 18 August showed a loss of $589 million and the company did cancel its dividend.  Origin management highlighted a reasonably rosy future, and analysts seem to agree, estimating a 67.8% increase in earnings per share (EPS) over the next two years. The share price is down about 27% year over year and 60% over two years.
Santos Limited (STO) posted a record low profit in its Half Year results released on 19 August.  A year ago Santos posted a profit of US$25 million, which evaporated into a US$5 million net loss this year, the first reported net loss in Santos history.  It was a “perfect storm” of events contributing to the result including low oil and LNG prices, lower production of coal seam gas, and a massive one one-time write-down on the company’s Gladstone Liquefied Natural Gas (GLNG) operations. Santos eliminated its first half dividend but management hinted the dividend could come back at year’s end.  Analysts have the company’s EPS growth forecasted at 42.5% over the next two years.
Shareholders of Woodside Petroleum (WPL) saw their dividends cut by 48%, following a reported $50 million dollar Half Year 2016 loss reported on 19 August.  In the Full Year 2015 results reported in February the company showed a reduced profit but still cut its final dividend by 60%. EPS for the year came in at only $0.043.  However, analysts remain bullish and expect EPS to climb to $1.03 in FY 2017 and to $1.48 in FY 2017.

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week’s newsletter