The days of dreamy dividends are over. Utilities nationwide are feeling the squeeze of slowing sales amid rising energy prices, and seemingly untouchable dividends are getting the guillotine. But refocusing finances elsewhere isn’t always a bad thing, and could ultimately give investors more bang for their buck. Let’s take a look at two utilities that recently revised dividends, three that haven’t, and decide which stocks deserve a slice of our portfolio.
Why are all the dividends dying?
Companies don’t reduce dividends because of a bad quarter – or for that matter, even a bad year. Income investors go gaga for growing dividends, and any corporation that cuts theirs also risks cutting itself off from a chunk of its shareholders.
Nonetheless, shrinking sales forecasts are forcing many utilities to rethink their own investments. A January report from the Department of Energy estimates that electricity use will ooze forward at a miserly 0.58% compound annual growth rate for the next decade.
This means that utilities will have to focus on their bottom lines instead of relying on top-line growth to push profits higher. And bottom-line growth (i.e. efficiency) requires the same thing dividends do: cold hard cash.
Dividend haircuts… looking good?
As Q4 earnings reports continue to stream in, two corporations announced massive dividend cuts as part of larger financial restructuring initiatives. Exelon Corporation (NYSE:EXC) will cut its dividend by 40% starting in Q2 2013, while Atlantic Power Corp (NYSE:AT) plans to slice its monthly dividend by 66% starting in March.
The two utilities’ CEO’s had uncannily similar statements on the matter, citing macro concerns, a renewed focus on growth, and a more long-term perspective as key reasons for their dividend haircuts. Buzz words like “flexibility,” “consistent with our outlook,” “enhance,” and “attractive total return” call for plenty of reading between the lines, but each executive delivered an underlying and undeniable message: times are changing, and we’re changing with them.
Before the reduction, Exelon Corporation (NYSE:EXC) and Atlantic offered yields around 7% and 10%, respectively. With the average yield for utilities clocking in at 4.1% annually, these utilities’ offerings were easily overgenerous considering their cash dividend payout ratios.
Dividends without end?
Canada-based Brookfield Infrastructure Partners L.P. (NYSE:BIP) currently offers a $0.43 quarterly dividend (around 4.3% yield) that has grown around 160% since the utilities and timber holding company first launched its IPO in 2008. Its dividend isn’t alone in growth – its stock has jumped 128% in the same time period, delivering quarterly earnings and longtime growth for shareholders. Motley Fool’s Inside Value found this diamond in the rough back in its beginnings, but its current P/E ratio of 77 has pushed its stock up enough to put any new purchases on the back burner. Even the best dividends have a price.