We recently compiled a list of the 10 Biggest Dividend Cuts and Suspensions of 2024. In this article, we are going to take a look at where The Estée Lauder Companies Inc. (NYSE:EL) stands against the other stocks.
Dividends hold great appeal for investors—they appreciate receiving them and strongly dislike reductions. Despite this, numerous major companies have reduced their dividend payments over time for various reasons. This trend, which gained momentum in 2020, persists as many companies continue to recover from the financial impact of the pandemic, leading to further dividend cuts.
According to research by McKinsey, outside of financial crises, only 1% to 2% of dividend-paying companies reduce their payouts annually, typically involving seven or eight major firms. The key for investors is to identify such companies in advance and avoid them until after the dividend has been reduced, which can present new opportunities. However, predicting which companies might cut dividends can be challenging. Wolfe Research strategist Chris Senyek highlighted three warning signs: excessively high yields, which may indicate underlying problems; high debt levels, which divert cash flow to interest payments rather than shareholders; and a high payout of free cash flow, leaving little cushion for the company in times of economic downturns or recessions.
Also read: 10 Dividend Stocks For Steady Income
While dividend cuts are generally disappointing for investors, Morgan Stanley offers an interesting perspective on them. Although dividend stocks typically suffer when payouts are reduced, some of these stocks might still present opportunities, according to the firm. Companies often cut dividends due to financial difficulties or economic challenges. Research from Morgan Stanley shows that investors usually sell off these stocks in the six months after the cuts are announced. However, once the initial negative reaction is factored in, there may be attractive buying opportunities in certain cases, as noted by strategist Todd Castagno. Here are some comments from the analyst:
“In the 6-months following a change in regular quarterly dividend policy, we found companies that announced a dividend cut of more than -25% underperformed the market by -1,200 bps, on average, while smaller dividend reductions outperformed by +480 bps, on average.”
According to Castagno, one year after announcing a dividend reduction, companies that cut their payouts by 30% or less outperformed the market by 1,900 basis points, while those with cuts deeper than 30% lagged the market by 1,800 basis points on average. Morgan Stanley analyzed Russell 1000 dividend-paying companies that reduced their dividends between 1962 and 2024. Over the past year, numerous companies have lowered their payouts, and the firm compiled a list of 30 such companies, excluding those in the financial, utilities, and real estate sectors. While many firms implemented significant dividend cuts, several reduced their dividends by 30% or less.
That said, many companies have regained strong footing and recovered quickly after the pandemic, which has led to a decline in the number of dividend cuts over the years. A report by S&P Dow Jones Indices revealed that only 27 companies reduced their dividends in Q3 2024, marking a 56.5% decrease from 62 companies in Q3 2023. The total value of these cuts was $4.6 billion in Q3 2024, down from $9.2 billion in the same quarter the previous year. Over the 12 months ending in September 2024, 140 companies reduced their dividend payments, a significant 70.8% drop from 479 cuts in the prior 12-month period. The overall value of dividend decreases for the current period was $19.5 billion, a 26.4% reduction compared to $26.4 billion during the previous 12 months.
Despite these encouraging numbers, many major companies have disappointed investors by reducing their dividend payouts in 2024.
Our Methodology:
For this list, we checked companies that have announced dividend reductions in 2024 due to the current market conditions and other factors and picked 10 prominent names from that list. Next, we ranked these stocks according to the number of hedge fund investors having stakes in them at the end of Q3 2024, according to Insider Monkey’s database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of a makeup artist carefully applying Makeup Products to an clients face.
The Estée Lauder Companies Inc. (NYSE:EL)
Number of Hedge Fund Holders: 49
The Estée Lauder Companies Inc. (NYSE:EL) is an American multinational cosmetics company that offers a wide range of related products and services. Due to the complexities of the prestige beauty market, including the challenges in predicting the timing of recovery in mainland China and Asia travel retail, the company slashed its dividend to a more suitable payout ratio. This reduction also provides greater financial flexibility for the incoming leadership team to accelerate the company’s profitable growth. The company still considers dividends an important part of its capital allocation strategy, provided the payout ratio is appropriate.
In fiscal Q1 2025, The Estée Lauder Companies Inc. (NYSE:EL) reported revenue of $3.36 billion, down by 4.5% from the same period last year. Despite its challenges, the company is working to overcome its struggles. It has seen strong organic sales growth in the Skin Care category, particularly in the EMEA markets, driven by the popularity of its night-time innovations. In addition, the company achieved significant share gains in prestige Skin Care in China for the second consecutive quarter, led by La Mer. The company has also advanced its strategy to capitalize on the growth opportunities in Fragrance. It expanded the reach of its luxury and artisanal portfolio and launched BALMAIN Beauty, aiming to solidify its strategic position in the luxury Fragrance market. This was reflected in the quarter when the company became the top-ranked player in Japan’s Fragrance category, driven by Le Labo and Jo Malone London.
The Estée Lauder Companies Inc. (NYSE:EL) ended the quarter with $2.35 billion available in cash and cash equivalents. During the quarter, it returned $0.24 billion to shareholders through dividends. The company pays a quarterly dividend of $0.35 per share for a dividend yield of 1.88%, as of December 22.
As per Insider Monkey’s database of Q3 2024, 49 hedge funds owned stakes in The Estée Lauder Companies Inc. (NYSE:EL), up from 47 in the previous quarter. These stakes have a consolidated value of over $1.87 billion. Among these hedge funds, D E Shaw was the company’s leading stakeholder in Q3.
Overall EL ranks 3rd on our list of the stocks with the biggest dividend cuts in 2024. While we acknowledge the potential of EL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than EL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.