Scorpio Tankers Cuts Dividend 92%, Stock Rises 7.5%

Shipping company Scorpio Tankers Inc. STNG was rallying strongly on Monday on more than two times the average volume. The catalyst? Was it the company's fourth-quarter outperformance or an announcement concerning a cut to the dividend?

If the latter is the case, then it looks like a shady plot. Or, could it be due to short interest built up in the stock, triggering a short squeeze?

Q4 Review

The company announced an adjusted fourth quarter loss of $0.18 per share on revenues of $106.07 million. Analysts, on average, estimated a loss of $0.19 per share on revenues of $103.89 million.

Dividend Slashed

Scorpio Tankers also announced a reduction in its quarterly dividend to $0.01 per share from $0.125 per share, nearly a 92 percent cut to its dividend. The company, though, hasn't given any reason for the sharp reduction.

Short Percentage Not Alarming

Data from shortsqueeze.com show that short percentage was 11.35 percent of the float for the company, with the days to cover the short interest at 4.2. The percentage is not high enough to warrant an alarm signal telegraphed concerning a short squeeze.

Then, What Explains The Gains On Monday?

Though the fourth-quarter outperformance is a stock-booster, the move to substantially trim the quarterly dividend is seen by some as the reason for the stock run up.

Dividend is a source of steady income for investors. In about 80 percent of the cases, dividend cuts have triggered selloffs in shares. So, why should investors be happy about a dividend cut of this magnitude? Would they be happy seeing their dividend income vaporizing into thin air? To understand this, we need to understand the logic of why a company ventures into dividend cut, knowing fully that such a move can be detrimental to its stock.

• When a company is confronted by operating problems such as continuous declines in earnings or a loss, and it has no other leeway to stem the rot, a final option could be to lay hands on the dividend, if it is a dividend paying company.
• Sometimes companies may want to resort to preemptive actions. Those companies seeking to conserve cash to meet future financial obligations may zero in on the option of dividend cut.
• Conserving cash by cutting down on dividends, may also be done to embark on strategic options before the company, which, if not now, at least in the intermediate and long-term future would generate returns.

Thus, investors may be advised not to press the panic button and in turn the sell button in a knee-jerk reaction if the company you are following announces a dividend reduction. Investors should look at the company's financials, cash & cash-flow positions and strategic options before it to see if the dividend income, which otherwise would have accrued to their bank account, is being put to good use so that you are the winners in the long run.

At last check, Scorpio Tankers was jumping 11.45 percent to $3.99, marking a three-week high, although substantially off the sub-$13 levels it traded post its IPO in 2010.