This past year has been a tough one for investors, especially those who rely on dividend payments. Worsening economic conditions have led to many companies cutting or suspending their payouts. It serves as a painful but important reminder that dividend payments are never a guarantee.
Three companies that recently slashed or suspended their dividend payments include Intel (INTC -0.33%), Algonquin Power & Utilities Corp (AQN 2.29%), and Healthcare Services Group (HCSG 0.19%). Below, I'll look at why they announced changes this year and whether these stocks could make for good contrarian investments.
1. Intel
Semiconductor giant Intel announced in February that it would be slashing its dividend by a whopping 66%, down to $0.125 per quarter. For many, it didn't come as a surprise as the chipmaker was struggling to keep its free cash flow positive in recent quarters.
INTC Free Cash Flow (Quarterly) data by YCharts
Plus, with big investments to bolster its domestic chip manufacturing capability that would cost upwards of $100 billion, it was at the very least going to be a challenging situation for Intel to keep paying a high dividend while also setting aside money for growth initiatives.
The company's dividend yield is 1.7% and remains competitive, in line with the S&P 500 average. However, there's also the risk that it may not be enough of a cut -- depending on how much more money the business may need to pour into its operations.
Intel is in a tough situation, and unless you have a high risk tolerance, it still may not be worth taking a chance on the company. Shares of Intel are down 43% in the past year, and things could get worse before they get better.
2. Algonquin Power & Utilities
Utility companies are normally seen as safe dividend investments to hold. Their operations are stable since they provide necessary services. But as Algonquin Power & Utilities has shown, even their payouts aren't a guarantee.
In January, the company cut its dividend by 40%. Algonquin's high debt load and need to free up money for growth are reasons why the business needed to slash its payouts. In 2021, the company announced plans to acquire Kentucky Power, but the $2.6 billion transaction may not close. Analysts believe regulators will block it due to concerns about higher rates.
As of the end of last year, Algonquin had $7.5 billion of debt compared with just $1.1 billion in current assets. It also had negative free cash flow, and it has been unprofitable in recent quarters.
AQN Net Income (Quarterly) data by YCharts
Even with the decrease in the dividend, however, the company still pays a high yield of 5.6%. But investors should remain cautious. Depending on how the business performs and how its strategy may shift if its pending acquisition falls through, even its reduced payout could remain a question mark.
Down 48% in the past year, this hasn't been a great stock to own, and investors are better off taking a wait-and-see approach with Algonquin for the time being.
3. Healthcare Services Group
Healthcare Services Group didn't just reduce its dividend this year -- it announced it would be suspending its payouts until further notice.
After boasting of a dividend streak that featured 77 quarters of consecutive increases, it announced in February that the payout would be no more as the company was "rebalancing its capital allocation strategy to enhance financial flexibility." It's a cautionary tale as to why investors shouldn't assume that dividend streaks provide extra safety.
Healthcare Services Group provides housekeeping and dining services for businesses in the healthcare industry, including nursing homes and hospitals. But inflationary pressures and higher wages have made its business particularly vulnerable of late. Its free cash flow has turned negative in the trailing 12 months, and profits have also been falling. As a result, the company's payout ratio was up over 200% at one point.
HCSG Payout Ratio data by YCharts
Healthcare Services Group could have simply reduced its dividend, but it chose a different strategy altogether by buying back shares instead. The day it announced the suspension of the dividend, it said that its Board of Directors approved repurchasing up to 7.5 million shares. Unlike dividend payments, share buybacks aren't typically consistent and investors don't anticipate cash flow every quarter, so that can take some of the pressure off the company.
But without a dividend, investors may be left with little reason to own shares of Healthcare Services Group. Its sales have declined by more than 8% in three years, and the bottom line has deteriorated as well. Now, without even a recurring payout, further declines could be inevitable.
In the past 12 months, the healthcare stock has fallen 26%, and there's little reason to expect that trajectory to change anytime soon. Even if you're OK with some risk, there's too much of it with Healthcare Services Group to make it a worthwhile buy as there just isn't enough upside with this investment to justify taking a chance on it.
