A dividend cut reduces the payment per share; an omission stops it altogether. A well-known study of US companies found shares fell about 7% on average over the three days around an omission announcement, then kept drifting to about 11% below the market over the following year (Michaely, Thaler & Womack, 1995). A larger US study of cuts and omissions from 1927 to 1999 also found weaker returns afterwards, lasting about a year only (Liu, Szewczyk & Zantout, 2008).
The businesses behind the cuts told a different story. Companies that cut had seen earnings fall in the year of the cut and the year before, and then, on average, earnings rose significantly the year after (Benartzi, Michaely & Thaler, 1997). That's what rebasing is meant to do: reset the dividend to a level the business can carry, then rebuild. None of this is a rule for any one company. These are US averages from long-past samples, a cut usually arrives alongside other bad news that's hard to separate from it, and your own total return after a cut depends on what you paid and what you did next.
US omissions, Michaely, Thaler & Womack (1995). An average across many companies, not a forecast for one.
SOURCES
- Michaely, R., Thaler, R. H. & Womack, K. L. (1995). Price reactions to dividend initiations and omissions: overreaction or drift? Journal of Finance, 50(2), 573–608.
- Benartzi, S., Michaely, R. & Thaler, R. H. (1997). Do changes in dividends signal the future or the past? Journal of Finance, 52(3), 1007–1034.
- Liu, Y., Szewczyk, S. H. & Zantout, Z. (2008). Underreaction to dividend reductions and omissions? Journal of Finance, 63(2), 987–1020.
Educational content only. It is not personal financial advice.