Dividend cuts are always interpreted as a financial strategy to cover the involved company against the risk of default on dividend payments in the long run. However, the recent cuts by oil and Blue-chip companies may not exactly reflect the same narrative for various reasons. For instance, a decrease in revenue for oil companies mostly results from the high price volatility of oil products, oil spills and leakages, and accidents involving natural gas and oil. Therefore, given the financial impact of these events, a company may cut down dividends to reserve cash to meet its short-term financial obligations while fixing the problem at hand, for the case of spills and leakages. Also, price volatility is frequent is such industries hence cuts due to low revenues might not necessarily be for long-term protection. Although, this decision hurts the stock prices of the involved companies, it is a wise decision to avoid further financial problems apart from low margins and revenue.
Dividend cuts will enable such firms to reserve enough cash to meet their debt obligations and also protect their credit rating which is crucial as it is through their resting that they can easily raise capital in future when needed. Other companies that have had to cut dividends in this space include Seadrill in 2014 and GP in 2010. Seadrill cut down its dividends by half to compensate for the impact causes by the fall in oil prices in 2014, while GP did the same after an oil spillage had them lose millions of worth gallons of oil to the Gulf of Mexico. Ultimately, the decision to cut dividends always has some good reason to it: GE's situation for instance demanded the cut to quell the fear from investors of an upcoming cash crash. GE has registered a slight growth in revenue since its action and hopefully the cut will not be long term.
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