NEW YORK (The Deal) - Dividends are cherished by the widows and orphans set. They are a portion of earnings that companies dole out as an incentive to shareholders to buy and hold onto to their stocks. For some investors, they're a little like a Christmas gift in July - unexpected, but gladly received. But a lot of investors rely on dividends to help supplement their income, and so when they're taken away, it comes as a bit of a shock.
That's what happened with Chesapeake Energy (CHK - Get Report ), which said last week it was eliminating its dividend "due to the current commodity price environment for oil, natural gas and natural gas liquids and the resulting reduction in capital available to invest in its high-quality assets." It also announced an asset sale to private equity-backed FourPoint Energy that will bring in cash proceeds of $90 million.
Analysts at Tudor, Pickering, Holt & Co. said the move was "prudent, " saving the company $240 million per year, noting that few investors bought Chesapeake's shares for the dividend - 35 cents per share per year, or a 3.4% yield. "Given (the) move in commodity prices, we believe investors will continue to favor capital discipline, " the analysts said.
Mike Kelly, an analyst at Global Hunter Securities, agreed that cutting the dividend is a "painful but necessary first step" to address what he thinks will be a rapidly increasing leverage position for Chesapeake, whose net debt-to-earnings before interest, taxes, depreciation and amortization ratio will approach nine by the end of next year based on his math and what the market foresees for oil and gas prices.
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The news sent the stock of the Oklahoma City oil and gas company down almost 10% on the Tuesday it was announced last week to $9.25. The stock subsequently slipped to as low as $8.28 on Friday, near its 52-week low. On Thursday, it closed at $8.99, down 16 cents.
SunTrust Robinson Humphrey analyst Neal Dingmann wrote in a report Monday that he wouldn't be surprised to see Chesapeake bring in more capital by duplicating "last year's success" and shedding one or two of its seven main operating regions - maybe the Powder River Basin and the southern part of its Mid-Continent asset, with either bringing in another $500 million. He also could see a sale of the entire company, as it's one of the most "asset rich" of the companies he covers with a net asset value "well north" of his $15 price target. A company spokesman wouldn't comment.
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