Risky Dividends: Kohl's Suspends Dividend After Raising It In March, Others Will Follow

Why would Kohl's (KSS) slash its dividend after raising it just two months ago, and why would the stock go up on the same day as the announcement?

These are strange times and this is a strange case.

Here's why: Yesterday Kohl's announced that is secured a $1.5 billion revolving line of credit with Wells Fargo and immediately drew down the entire amount. When it did that, it was forced to suspend the dividend because of covenants in the revolver.

Kohl's also announced a plan to reopen stores and said that some stores were already opened. KSS was up 7.5% yesterday.

Dividend shocks like this one can be especially painful to options holders because a high dividend like Kohl's pays has a large effect on the price of dividends. However, many options investors did not suffer from a surprise cut as the options market was expecting it.

ORATS tracks the implied dividend in the options prices. The chart of Kohl's annual implied dividend is below. Pre-covid the implied dividend was about where its dividend stood at $2. But starting after it raised and paid its dividend in early March, the implied dividend fell to where it is today about $0.50.

ORATS chart

Kohl's is a component of the consumer discretionary SPDR XLY. The weighted average implied dividend for the components of XLY are shown below:

ORATS chart

Components of the XLY have seen their implied dividends fall from pre-covid levels of $1.40 to $1.00 before rising to $1.15 recently.

Of the dividend payers in the XLY, Wynn Resorts (WYNN), Royal Caribbean Cruises (RCL), Expedia (EXPE), Ross Stores (ROST), Advance Auto Parts (AAP), TJX Companies (TJX), MGM Resorts (MGM), and Lennar (LEN) are expected to have large cuts like Kohl's. Below are the tickers in the XLY sorted by their annual dividend amount and shown with the expected cut implied by options prices.

ORATS chart

Expect the options market to foreshadow dividend cuts coming soon.

More reading here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Matt Amberson

Matt Amberson, Principal and Founder of Option Research & Technology Services. ORATS was born out of a need by traders to get access to more accurate and realistic option research. Matt started ORATS to support his options market making firm where he would hire statistically minded individuals, put them on the floor, and develop research to aid in trading options. He is heavily involved with product design and quantitative research. ORATS offers data and backtesting on a subscription basis at www.orats.com. Matt has a Master’s degree from Kellogg School of Business.

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