Does your heart sink when a company announces a cut in dividends?
You are definitely not alone in that heart-wrenching feeling.
Our brains often interpret a dividend cut as a clear signal of financial distress or poor performance for the quarter or year, and we instinctively expect the share price to drop.
However, is a dividend cut always a death knell for the share price?
Let’s take a look at a few companies that recently cut their dividends, but their share prices have gone up instead.
The Hour Glass Limited (SGX: AGS): Acquisition down under
The Hour Glass, or THG, is one of a few Singapore-authorised retailers offering luxury and specialty timepieces.
With a mission to be the watch world’s leading cultural retail enterprise, it has firmly established itself as a go-to destination for enthusiasts and collectors, a position underscored by its consistent revenue growth over the years.
For the second half of fiscal year 2025, THG delivered a resilient set of results.
Despite intensified competition, revenue saw a robust 9% year-on-year (YOY) increase, reaching S$623 million.
However, elevated operational costs impacted its margins, leading to a 6% YOY decline in earnings per share (EPS) to S$0.1148 for the same period.
Given THG’s strong track record of consistent dividend payouts, the reduction of its final dividend per share from S$0.06 to S$0.04 came as a surprise.
This dividend cut is unlikely to be solely driven by the decline in profit.
Even if the final dividend had been maintained at S$0.06, combined with the interim dividend of S$0.02, the payout ratio would still have been a modest 38%.
Most plausibly, this strategic move is connected to its recent A$90 million acquisition of an Australian watch retail entity, suggesting the company is proactively managing its cash outflow following this significant deal.
Intriguingly, the market did not react negatively to the reduced final dividend.
In fact, since the announcement of its FY 2025 earnings approximately a fortnight ago, THG’s share price has gained around S$0.09, more than enough to make up for the dividend cut.
While various factors could contribute to share price movements, this positive market response suggests an acceptance of the company’s decision.
This implies that the dividend reduction is perceived as a strategic cash management choice rather than a reflection of weakening business fundamentals.
UMS Integration (SGX: 558): Ramping up for new customers
UMS is a precision engineering group that specialises in manufacturing front-end semiconductor components, including the production of modular and integration systems.
In its recent 2025 first quarter (1Q 2025) business update, it also announced a lower quarterly dividend of S$0.01, as compared to S$0.012 a year ago.
This is in spite of a 7% YOY increase in revenue to S$57 million, and a minor dip of around 2% in its EPS from previous year of S$0.0141 to S$0.0138.
Similar to THG, its share price has increased, by a whopping 15%, since the announcement a month ago.
Hence, it appears that the market is unfazed by the dividend reduction.
Indeed, UMS has increased engagement with its new key customer.
This optimism stems from expectations of accelerating component shipments and the qualification of numerous new product introductions in the quarters ahead.
Get Smart: Investing first, dividends second
It’s undeniable that dividend investors typically prefer to see sustainable and increasing dividends from the companies they’ve invested in.
However, a cut in dividends should not always be perceived negatively.
As dividend investors, we should prioritise the “investing” aspect, rather than be fixated with the absolute “dividend” per se.
This means spending time to understand the decision behind the cut and assessing the future potential of the business.
Just like the two examples shared earlier, if the reason stems from temporary cash flow management for business expansion, the long-term capital appreciation often outweighs the temporary reduction in dividends.
Ultimately, these strategic decisions can foster stronger, more profitable companies, leading to potentially even higher dividends and greater returns for patient investors in the long run.
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Disclosure: Chan Kin Chuah owns shares of The Hour Glass and UMS Integration.
