Cramer Finds Lesson in SuperValu Dividend Cut


In the hunt for yields, “Mad Money” host Jim Cramer points out that not all dividends are created equal.

As an example, he used SuperValu, the giant supermarket chain that had continually reassured investors that it believed in its dividend – and how important they were for shareholders.

But there was a caveat.

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“Remember, when stocks go down, yields become larger as the dividend stays the same size but the divisor—old fashioned arithmetic—becomes smaller. Hence you get a bigger yield from the division,” Cramer said Thursday. “Few stocks in the S&P 500 had a bigger dividend than Supervalu going in to today’s session, not because the dividend was outsized but because the stock had shrunk.”

Experience shows that robust dividends have helped slow the sell-off of sluggish stocks, and reinvestment of dividends can compound gains.

But it’s not always a sure thing.

“Today we found out what happens when we see this process play out for companies with battered balance sheets and declining fortunes,” Cramer said. “The dividend gets slashed or, in this case, eliminate despite all protestations to the contrary that anything like that could occur, including assurances given to me last year by the CEO, of comfort with that dispensation of cash directly from the company to you, the shareholder.”

SuperValu stock lost half its value Thursday, closing down to $2.60 per share. It also announced that it would eliminate its dividend and possibly put itself up for sale.

CEO Craig Herkert cited “holistic” reasons for the decision.

“All I can say is it was a mighty bitter pill for shareholders, many of whom relied on that dividend as an important source of income,” Cramer said. “That 30 cents yearly, while not making up for the hideous two-thirds decline in the stock since 2008, did routinely draw in buyers with each reiteration of confidence that the CEO made.”

Cramer said the cautionary tale in SuperValu is twofold.

First, the sector has become increasingly competitive, with new players such as Dollar Stores, Target, Wal-Mart and Whole Foods pummeling the company, as well as traditional supermarket competitors Kroger and Safeway.

“But second, and most important, is that sometimes outsized yields like Supervalu are out-and-out redflags signaling their own reduction or elimination,” Cramer said.

“To me it’s another clear cut case of the need for not buy-and-hold, the preferred conventional wisdom of greybeards everywhere, but buy-and-homework,” he added. “If you had done the homework I believe you could bet that management couldn’t pull off its assurances and you could have sidestepped today’s hideous losses, the worst in the S&P 500.”
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