This week I was mildly surprised to see that Centrica (which I've owned since 2012) had cut its final dividend as part of a plan to rebase the dividend some 30% below its previous level.

It wasn't a complete surprise given the recent collapse in the price of oil, but it's the sort of event which demands some sort of reaction.

As I see it, shareholders have three main options:

  1. Panic sell: Break out in a cold sweat, curse Centrica's management and place a sell order immediately
  2. Do nothing: Be mildly miffed, but do nothing with the intention of holding the shares “forever"
  3. Weekend review: Wait for the weekend and then review the company again in order to decide whether to keep holding, start selling or perhaps even buy more if the price drops enough

Reaction option 1: Panic sell

If you've been reading this blog for a while you'll know that I am not a fan of panic selling, especially when it relates to an established, successful company like Centrica.

Sure, panic sell an AIM-listed micro-cap mining company that operates in some country you've never heard of, but Centrica?

I've written about this before, but in my view panic selling a defensive dividend payer like Centrica is like selling a buy-to-let property because its rental income drops for a year or two.

Typically rent will drop because there's a void period, i.e. a period where one tenant leaves and another can't be found immediately. The property sits empty for a few months and so rental income for the year is lower.

Panic selling in that situation would mean putting the house up for sale immediately at a knock down price, perhaps 20% below its true market value, just to get rid of the place.

To me that is just crazy. It locks in a massive capital loss just because income has dropped a little bit for a little while. The property is still there, its basic ability to generate an income is no different, and in time the income may well bounce back to where it “should" be. The same could easily be said of Centrica or any other defensive dividend payer.

The same sort of situation led investors to sell Aviva after it cut its dividend in 2013, causing them to miss out when the share price rebounded massively shortly after (a roller coaster ride which I went through myself).

Reaction option 2: Do…

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