Struggling commodity prices haven't been kind to uranium miner and refiner Cameco Corporation (NYSE: CCJ), holding company CVR Energy (NYSE: CVI), and oil major BP (NYSE: BP). Yet they all have one thing in common: a stubborn commitment to paying shareholders dividends.
All three have been resisting major changes to their dividends in hope that the selling prices for their respective products will improve. That has resulted in burning through cash, taking on debt, or a combination of both. If conditions persist much longer, these embarrassingly unsustainable dividends may need to be slashed -- or suspended entirely.
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The world's worst performing commodity in 2016 wasn't crude oil or a fertilizer, but rather uranium. Premature closures from operating nuclear reactors and a sharp reduction in commitments to build new ones have resulted in a sharp mismatch between supply and demand. That has been excruciatingly painful for Cameco Corporation and its shareholders.
The stock has dropped 54% in the past three years. A net loss of $46 million in 2015 was far from the net income of $239 million achieved in 2013 -- and things only got worse in the first quarter of 2017 compared with the same period last year. Somewhat surprisingly, the company has maintained its quarterly dividend payment of $0.08 per share since early 2011. The trend makes that decision a bit of a head-scratcher.
Despite dramatically reducing corporate and operating expenses over the years, Cameco Corporation essentially burned through cash dollar for dollar to keep its dividend intact in 2016. It was in a relatively comfortable position to do so a few years ago, but as losses begin to pile up and operating cash flow dwindles -- with no recovery in sight for uranium prices -- management will find increasingly little wiggle room. That makes it one of the most unsustainable dividends on the market.
The kids aren't all right
CVR Energy is the parent company of refiner CVR Refining and nitrogen fertilizer producer CVR Partners. That means a large portion of the income of these two companies eventually gets paid out to shareholders in the holding company. Or that's the way it's supposed to work, anyway. The strategy hasn't been very advantageous as crude oil and nitrogen fertilizer prices have each been too low to allow profitable operations for the aforementioned child companies.
While management has greatly reduced distribution payments, the dividend at CVR Energy is still unsustainable.
First, the cash position was only maintained in recent years by issuing debt. Second, the company's dividend payments per share still greatly exceed EPS. There is some good news, however. CVR Refining has shown great operating improvements in the past three quarters. That success has continued to pass through to CVR Energy and will keep doing so. However, it's being dragged down by the continuing struggles at CVR Partners, which has essentially suspended distribution payouts in recent quarters. Taken together, these factors show that this dividend is unsustainable.
Betting on an oil recovery
To be fair, many multinational oil companies are well positioned to hunker down and weather out market cycles. Nearly all have large cash positions, have strategically rebalanced their portfolios to focus on low-cost production, and have met their obligations to finance expensive megaprojects, with scaled-back plans for future ones.
While that's all true for BP, it may not be enough to comfortably fund its dividend payments if crude oil prices continue to sag through the rest of the decade.
The company is clearly hoping that efforts to increase operating efficiencies will combine with rising oil prices to drive net income and cash flow higher before the end of the decade. Financial metrics have steadily improved in the past three quarters, which is good news, but there's an awful lot of ground to make up. In the past four quarters, dividends per share have totaled $1.20, while EPS registered at just $0.11. Of course, without an unexpected market event, BP is unlikely to consider reducing its dividend payments anytime soon. But it probably should.
What does it mean for investors?
Unsustainable dividends can not only mislead investors about the health of the business but also work to make a struggling or transitioning company's financial health deteriorate even more quickly. For instance, had Cameco Corporation suspended its dividend at the start of 2015, it would have ended 2016 with twice the cash balance it reported, or an additional $240 million. That could have gone a long way toward extending its runway during uranium's ongoing rut. Instead, management is stubbornly holding on to its commitment to return value to shareholders in the near term instead of making difficult decisions that are in the best interests for the long term. All investors have different appetites for risk, but unsustainable dividends probably don't have a place in most people's portfolios.
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