I note that Manitoba Telecom, a boring but profitable firm providing telecommunication services in Manitoba, released their quarterly results today with a dividend cut – from $2.60/share to $1.70/share, paid quarterly.
With 65 million shares outstanding, this amounted to a reduction from $169M/year to $111M/year.
Given its free cash flow, which is now estimated to be around $160-190 million, this is a rational decision by management because it will give the company some room to either build up cash reserves or de-leverage from its approximate billion dollar long-term debt balance.
The market took down the common stock from $27.32/share to $24.98/share. Part of this is due to the reduction in expected earnings, but also likely due to investors bailing out on the payout cut.
The important lesson for an investor is that you cannot just look at the dividend yield and assume it will be stable – the company must be able to make enough cash, plus enough for future capital expenditures and debt repayments, in order to justify that dividend. Ultimately, the dividend itself is a metric that is should only weakly associated with the proper valuation of an equity security.
Manitoba Telecom has been on my watchlist for ages, but I still do not find any compelling value in the stock. This is another classic case of yield chasers getting burned.
I was waiting for that cut too. Still a much bigger drop required before I would consider buying either.