Benjamin Franklin once famously said that "in this world nothing can be said to be certain, except death and taxes". According to research from broker Evolution Securities, dividends should be added to that list. Given the state of company finances and the wider economy, some might say that view is a rather optimistic one.
Not so, says Evolution equity strategist Alex Stewart in a recently published research note 'Income Matters'. He says that although companies embarked on a dividend-cutting spree earlier this year, there's plenty to suggest we are at the bottom of the dividend-cutting cycle – and that the prospects for income seekers look a lot less bleak than they did just a few months ago.
Most companies will have given themselves enough slack to avoid a second round, he thinks. "Companies would have known for quite a long time that this [the collapse of Lehman's] was their opportunity to cut," he says, pointing out that many management teams opted for a large 'big bath' chop rather than risk death by a thousand, smaller cuts. "Management don't want to cut again and again, they need to get it right the first time. If they cut twice, it's basically resignation territory."
He also cautions that investors in cyclical stocks should regard the occasional payout cut as part and parcel of the investment proposition. Such companies inevitably have higher earnings at some parts of the cycle than at others, and in most cases a cut is eventually reversed. "If you're involved in dividend investing you know there's an economic cycle and you expect to have dividend cuts," says Mr Stewart.
