MercadoLibre (MELI), the largest online commerce ecosystem in Latin America, decided to eliminate its dividend in favor of using all of its cash internally for growth. This dividend cut was difficult to catch in advance for several reasons.
Specifically, MercadoLibre reported 71% sales growth the quarter it announced its dividend suspension, its free cash flow payout ratio was below 15%, the company had no debt, and its cash totaled nearly $600 million compared to annual dividend commitments of approximately $27 million.
Simply put, management's decision to stop the dividend was not due to the firm's financial health, but rather a change in capital allocation policy to take advantage of growth opportunities. Here was the company's statement:
"After reviewing our capital allocation process the Board of Directors has concluded that the Company has multiple investment opportunities that should generate greater returns to shareholders through investing capital into the business than issuing a dividend. Consequently, the decision has been made to suspend the payment of dividend to shareholders as of the first quarter of 2018, as it will free up capital for investment in multiple projects in our various platforms."
There's no easy way to get in front of these situations that involve so much management discretion, but fortunately they are very rare. Sticking with companies that have longer histories of paying stable dividends can help, and that is one of the factors our Dividend Safety Score system reviews.
MercadoLibre's dividend was quite small (MELI's dividend yield was less than 0.2%), and its stock price was largely unchanged on the news (and up over 80% in the year leading up to the cut). In other words, not only were few investors likely to have owned this stock for income in the first place, but any who did could have moved on to another idea without incurring a capital loss.