On Feb. 26, Atlantic Power Corp (NYSE:AT) did something responsible: It slashed its dividend by 66% in the name of long-term value creation. But the aftermath of its actions shows that dividend haircuts don’t always look good. Let’s dig deeper into Atlantic Power Corp (NYSE:AT)’s decision, peek into the past for some much-needed perspective, and check out the new look of another company that recently received a dividend haircut.
Dawn of the dead dividend
As part of Atlantic Power Corp (NYSE:AT)’s Q4 2012 earnings report, CEO Barry Welch noted that the utility’s board decided that “it was in the best interest of the company and its shareholders to establish a lower and more sustainable Payout Ratio that balances yield and growth and is at the same time consistent with our outlook for current and prospective projects under a range of scenarios.”
In real numbers, this announcement represented a 66% drop in the company’s monthly payouts, a move that would’ve devastated the utility’s 10.2% dividend yield – if not for its share price plummet.
But the cause for Atlantic Power Corp (NYSE:AT)’s crash didn’t come from its dividend cut. Since its announcement, three law firms have filed class action lawsuits against Atlantic Power Corp (NYSE:AT) for intentionally misleading investors about its current cash flow and the impending deadlines of key contracts. If the allegations turn out to be true, Atlantic Power Corp (NYSE:AT)’s dividend cut did nothing more than reveal an inevitable bald spot in the company’s receding hairline.
Look into the past…
Dividend cuts happen. This Friday, TECO Energy, Inc. (NYSE:TE) will celebrate the 10th anniversary of the day it dropped its dividend 46% to balance its books and refocus on its core businesses.
CEO Robert Fagan’s carefully chosen words during the announcement hint at what he was sure would amount to Wall Street suicide: “We recognize the greatest impact will be on our retail shareholders. However, we believe that it will be in their interests longer-term… This level of dividend positions TECO Energy, Inc. (NYSE:TE) to return to… long-term dividend growth when conditions improve.” But since that fateful day, TECO Energy, Inc. (NYSE:TE)’s stock has stepped up a respectable 66% alongside its growing dividend.