Vale (VALE) suspended its dividend after one of its dams suddenly burst in Brazil, causing billions of dollars of damages and widespread tragedy with over 60 lives lost. The Wall Street Journal reported that this was "the most deadly mining incident of its kind in more than 50 years."
Vale's business was actually in good financial shape before disaster struck. The firm's net debt was at its lowest level since 2009, its payout ratio sat below 30%, there were no major debt maturities through 2021, cash on hand exceeded $6 billion, and earnings were expected to grow at a double-digit pace next year. Moody's had even upgraded Vale's credit rating to Baa3 (investment grade) in July 2018.
However, with a major liability forming overnight, plus severe public outrage at the company (Vale wisely suspended executive bonuses as well), the firm's decision was a prudent one. Given the unforecastable nature of an event of this magnitude, coupled with Vale's otherwise solid financial health, we were unable to get in front of this dividend cut.
We already use a separate scoring template for mining companies to conservatively account for their cyclical and capital-intensive operations, but there were no warning signs in this situation (a German safety certifier had even found the mine to be stable in September). Going forward, we will consider placing even more weight on a miner's long-term dividend track record to gauge how conservative its operations have historically been managed.
Fortunately, the vast majority of dividend cuts can be spotted in advance since they are not triggered by a single high-impact, low-probability event. Unlike Vale, dividend cutters often possess some combination of a dangerously high payout ratio, falling earnings, and too much debt; their financial health does not materially change overnight.