Saturday, June 20, 2009

Dividend Cuts- New Management

cash cutIn our continuing series on dividend cuts, why they happen and how to learn to see them coming before they hit your portfolio today we are going to look at the curse of new management.

New Management

Bringing in new management is a regular occurrence in any large business. Management can be cycled in as a result of retirement or simply as the result of the board seeing the need for a changing of the guard. New management can come from one of two places, internal promotion and external hiring. The condition I will describe here comes as the result of both these types of hirings, but is a far more frequent occurrence with external hiring.

The Curse

When new management comes into a business they often have a honeymoon period where they can blame anything that is currently going wrong in the business on the previous management team. After about 6 months though this free pass period disappears and new management can no longer point fingers back at the old regime. The luxury of this honeymoon period affords management the ability to make all sorts of aggressive moves inside a company- lay off staff, close plants, and even cut dividends.

What you Can Do to See it Coming

Here are a few simple preventative measures you can take to avoid this happening to you. When new management are brought in:

  • Check the new management's history. See what they have done at other companies in the past, do they have a habit of making dividend cuts when times are bad. Some managers would sooner sell their children into slavery than make a dividend cut, others though are less troubled by it. There are lots of tools you can use to research executives, google finance and yahoo finance both provide info about current management in companies.

  • Listen. Surprises are expensive, and cause analysts to be cautious of a stock. Management will often tip its hand about a coming dividend cut so that analysts wont be caught off guard. Listen for phrases like "we expect hard times but believe we have a plan that can lead us into a profitable future which we will be making available in coming weeks." Ask yourself, why aren't they showing you the plan now?

  • Ask yourself what would you do. The best investors I have ever met are those that understand how to run a business. Look at the financials and ask yourself what you would do in the same situation, if a cut looks like the most appealing of options that may well be the way they are heading.

  • Use common sense. This plays into the last item. A friend of mine recommend a stock one time to me based entirely on the fact it had a 14% dividend rate. It was with little surprise that I saw the company bring in new management and cut that rate within a month.

Other parts in our series on Dividend Cuts:

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