What happens to stocks that miss dividend expectations

A lower-than-expected dividend payout tends to trigger a textbook share price reaction – the stock experiences a knee-jerk selloff on day one, and continues to sell off on day two as brokers downgrade their target prices.

In this educational piece, we'll analyse a recent dividend cut and its price action, and review some notable misses from February reporting season.

Deterra Royalties' Dividend Payout

Deterra Royalties (ASX: DRR) exclusively manages royalty interest in mining projects, notably the Mining Area C Project, operated by BHP. This business model allows the company to maintain a steady stream of income and dividends for shareholders.

In the past two financial years (FY22-23), Deterra maintained a dividend payout ratio of 100% of net profit after tax.

Last week, Deterra announced an all-cash offer for Trident Royalties – a listed royalty company that invests across a breadth of mining commodities, including lithium, gold and copper – for $276 million. The company plans to fund the acquisition via its existing $500 million of undrawn facilities.

"It’s too early for us to form a view as to the value accretion/dilution of this acquisition, but we’d highlight that potential Trident 2026 pretax revenue of ~US$23m would represent a post tax return of ~9% before opex," Citi analysts said in a note on Monday.

Given this offer, Deterra announced that while it will pay out 100% of its FY24 net profit as dividends, it will thereafter target a payout ratio of 50%. A rather uncharacteristic change of payout ratios.

"Today’s adjustment to our dividend policy is designed to better align it with Deterra’s targeted longer-term balance between capital growth and income returns," said Managing Director Julian Andrews.

To add some perspective, Macquarie was expecting the following numbers for FY23-26.

Source: Macquarie

The acquisition was poorly received, with the following price action on Friday, 14 June.

• Open: -2.7% to $4.34

• Session low: -12.6% to $3.90

• Close: -6.95% to $4.15

• Volume: 3.63 million (vs. 20-day average of 15.1 million)

Deterra shares are currently down another 2.5% on Monday, 17 June.

"For DRR shareholders, the disappointing aspect will the be announced reduction in dividend payout. Trident’s principal exposure is to lithium and for some DRR investors this may present a concern," said Citi analysts.

On a more light-hearted note – If you want to maintain the same dividend payout, you can just buy twice as many shares! (although you might want to double-check the math on that)

Thinking About Austal

One of my favourite examples from February reporting season was from shipbuilder Austal (ASX: ASB). The company unexpectedly declared no interim dividend ahead of a "large capex program to increase shipbuilding capacity and capability."

While most of its first-half FY24 results were in-line with market expectations, the stock finished the session down 12.6%.

A few other examples that come to mind include Corporate Travel (ASX: CTD), Woolworths (ASX: WOW) and Sims (ASX: SGM) – although these results were accompanied by weaker-than-expected earnings, management changes and/or guidance downgrades.

The bottom line

Dividends are arguably one of the most important metrics for larger cap stocks. Missing dividend expectations can trigger both a knee-jerk and sustained sell off.

Investing for a "sustainable income stream" is a top priority across nearly every age group, according to the ASX.

A dividend miss not only reflects underwhelming or poor earnings but it can also trigger a domino effect of broker downgrades, advisors recommending clients to exit the stock, and a breakdown in technicals.