Stocks was off to a generally positive start on Monday morning, buoyed by hopes about the possibility of the economy restarting if the coronavirus pandemic gets under control. Earnings season continues to churn forward, showing the initial impacts of the COVID-19-related shutdowns and foreseeing more pain ahead. Yet market participants took those outlooks in stride. Just before 11 a.m. EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 259 points to 24,034. The S&P 500 (SNPINDEX:^GSPC) rose 30 points to 2,867, and the Nasdaq Composite (NASDAQINDEX:^IXIC) picked up 85 points to 8,719.
As good as the market’s overall reaction was, there were definite losers in the market. General Motors (NYSE:GM) finally admitted the challenges of the current economic environment by making a much-anticipated yet unhappy move. Meanwhile, Diamond Offshore Drilling (NYSE:DO) faced an even bigger challenge that proved insurmountable, and shareholders are paying the price.
Image source: Getty Images.
GM suspends its dividend
General Motors saw its stock fall more than 1% Monday morning, losing ground despite the positive market. Investors reacted negatively to news that they’d no longer benefit from the 7% dividend yield the automaker had paid until now.
GM has worked hard to strengthen its balance sheet, and the latest moves came at the cost of capital return for shareholders. The company said early Monday morning that it had suspended its quarterly cash dividend on its common stock as well as suspending its share repurchase program. In addition, GM managed to negotiate an extension on a $3.6 billion revolving credit agreement to April 2022, giving it more time to navigate the financial aspects of the coronavirus crisis.
General Motors has had its auto factories idled since mid-March, and it appears unlikely to see production resume in the near future. Auto sales have fallen sharply, and the automaker will need to have a plan in place to keep workers safe in order to get them back to work.
Dividend investors weren’t surprised at the decision, coming as it did after Ford suspended its dividend last month. Nevertheless, losing another high-yield stock was a disappointment for dividend investors, and it could be just the start of a broader trend that goes well beyond the auto industry.
No Diamond in the rough
Elsewhere, Diamond Offshore Drilling shares were halted on Monday morning. Its share price fell more than 60% in premarket trading after the offshore drilling specialist made its last-resort move to restructure its debt.
Diamond Offshore filed for bankruptcy protection Sunday in a Texas bankruptcy court. The court filing listed a number of factors that led to the company’s decision, including the plunge in oil prices following disputes between Russia and various OPEC nations regarding production, coronavirus-inspired declines in demand for energy products, and falling day-rates for its drilling equipment.
The news didn’t come as a huge shock to Diamond Offshore investors. The company had chosen not to make an interest payment and had reportedly hired advisors to help it through the bankruptcy process. Nevertheless, many market participants see this as the first move among many potential business failures in the offshore drilling services arena.
Diamond Offshore hopes that it can restructure its debt by negotiating with creditors to continue doing business. Unless oil prices recover, however, it’s unclear when demand for offshore drilling will increase enough to justify further operations in the industry.