Atlantic Power
This case is discussed on Econothon II (in Blogger) last week.Atlantic Power (ATP) was priced at $14 a share in 2013 and paid a dividend of $.40 per share which is only a 3% yield.There were difficulties and accounting problems and ATP decided to cut it's dividend to $.12 per share;this is a 70 % reduction.The stock price reacted by dropping over a fairly short period of time to the $2.00 level.This is a 75 % reduction and the stock yield returned to close to it's old level.In fact, although the dividend reduction was done in 2013 the stock price is still at only $2.35 a share.In other words, there was a dramatic price drop and the price stayed down(except for small periods).It is the thesis of this piece that a stock after a dividend reduction will move in price to obtain yield equality or close to it.
The chairman who engineered this reduction was let go shortly after. And I believe although I am not certain that most of the board members responsible no longer stayed with the board.Doubtless the chairman was thinking of the long term welfare of the company and sacrificed his own job to improve the company in the long run.Very courageous if not very intelligent.Now in 2016 the company prospects look better but it has taken three years; a higher stock price could have helped with equity financing and made things easier but they chose to do things the hard way.
Just Energy
Just Energy (JE) is another utility,a Canadian utility, that faced with eroding revenues from attrition and eroding earnings decided to cut it's dividend also.It too was trading at the $13 to $14 a share level and paid a dividend of $1.25 per share.It's yield was about 10% to 11% but it was cut to $.50 a share which translates into 3% on a $14 share price.The stock price dropped quickly to the $6 level which made the dividend equal to about 8%.This is not equal to the old yield but it is not far from it. The price stayed here for about a year and a half and then started gradually to move back to the $9 a share area where it remains today.In summary, JE had not as dramatic a drop as ATP and moved back upwards quicker than ATP.It's prospects look better now than in 2013 also.It has also made changes to it's service standards and is working on it's customer service also.
Interestingly enough the Chairman of Atlantic Power was on also on this board and he was let go again. Although this blog does not know for sure if any of the 2013 board remains I believe that few remain, if any.Once again the board suffered in order to help the long term welfare of the company.Investors do not appreciate this kind of short term thinking.
Capital Power
This is another Canadian utility that was faced with a decision about cutting it's dividend as it had a very bad quarter.Capital Power (CPX)earnings were dramatically lower than the previous four quarters.But it's management took a long term perspective and realized that the future would be better and looked for an improved few quarters down the road.They decided to make a small increase in the dividend.The next quarter was better and they are looking at a good quarter this time.The stock price fell for a time from $22 to $16 a share or a 27% decrease. It did not stay down for long and now moved up quickly to the $19 level.As far as this blog knows the CPX board remains in place and is expecting a large capital program in 2016.
The Diagnosis
Transalta will likely only announce a small (11%) reduction in the dividend in their quarterly report.A reduction to $.16 annually will likely cause the stock to come to yield equality. This means that the yield will be the same as it was before the cut.On average the stock has generated a 7 to 9% yield.Although now it is temporarily higher.So if the dividend goes to $.16 the stock price will go to about the $2.00 to $2.25 range in order to earn the same yield.And the Chairman will announce an early retirement to be with his family.If the stock stays at $.16 per quarter then the price will stay in the $5 to $6 area and not stay there for too long before moving ahead.This will not cause too many changes in management nor the board.I hope they do the latter because I too am a shareholder.
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