* Buying and targeting dividend cuts can yield gains
* Tactic good for those who take a longer term view
* Portugal Telecom, Veolia risk future cuts -M.Stanley
By Sudip Kar-Gupta
LONDON, April 4 The scale of the share price hit
taken by European companies that cut their dividend is proving a
boon for contrarian investors willing to take a longer-term punt
on distressed targets.
Dividends have become a major attraction for those seeking
alternatives to ultra-low sovereign bond yields, and companies
that cut payouts - many in the telecoms, utilities and insurance
sectors - have typically been heavily punished.
That panic is particularly acute when many cash-rich
companies in other parts of the market are maintaining or
raising their dividends, Markit data shows.
Many of the investors who sell at such a point are equity
income funds, which consider dividend yield a crucial part of
the stock's attraction. Their retreat, however, leaves room for
less constrained buyers to buy in at an attractive price.
"A dividend cut is usually a positive inflection point for
share prices," said Morgan Stanley equity strategist Hanyi Lim.
Lim said Morgan Stanley's research showed that companies
which cut dividends by 90 percent or more outperformed by 48
percent over the next two years.
Telecoms group BT slashed its dividend by nearly 60
percent in May 2009, sending its shares down on the day by 6.4
percent to 88.40 pence. BT shares have since trebled in value,
beating a 40 percent gain in the FTSE 100 over that period.
Morgan Stanley's research highlighted companies under
pressure to cut debts and costs in the telecoms and utility
sectors, where many face having to reduce the heavy debt burden
taken on to finance infrastructure investment.
It singled out Portugal Telecom and utilities
Veolia and Suez Environnement as among those
most at risk of near-term dividend cuts.
Veolia said in February that it would step up efforts to cut
its debts, and although Suez Environnement said it planned to
maintain its level of dividend payout, it, too, is under
pressure to reduce costs.
A fresh cut by Portugal Telecom would follow similar action
last year, when it halved its dividend to help cut debt, even if
it moved to partly offset any investor pain then by announcing a
Its shares fell 3.6 percent on the day of the cut, but have
since recovered 20 percent.
More recently, UK insurers RSA and Aviva have
shown the value of the trade after slashing their dividends in
late February and early March respectively.
Aviva fell 18 percent to an intraday low of 295 pence after
its March 7 dividend cut, while RSA's cut on Feb. 20 caused its
shares to fall 14.2 percent. Both have outpaced the broader FTSE
100 since then.
Hargreaves Lansdown's head of equities Richard Hunter said
long-term investors who had swept up Aviva after its cut had
made it a "recovery play overnight".
Hartmann Capital trader Basil Petrides, meanwhile, bought
Aviva on the day of the cut at between 309 and 312 pence and
said he expected it to hit 400 pence over the next year.
"At these levels, they do represent good value for money.
When a stock like Aviva falls between 10 and 15 percent in a
day, you've just got to jump on it," Petrides said.
($1 = 0.7694 euros)
(Editing by Stephen Nisbet)