R.R. Donnelley’s (RRD) yield is above 9% pointing to a lack of confidence reflected in the market that the dividend is sustainable. Is a cut Imminent? To get a better handle on the question we’ll examine some important issues that impact the sustainability of the dividend. They are:
- Pension liabilities
RRD’s pension was $1 billion underfunded at the end of 2011, approximately a 100% increase over 2010. On November 2, 2011, the Company announced a freeze on further benefit accruals under all of its U.S. pension plans as of December 31, 2011. Beginning January 1, 2012, participants ceased earning additional benefits under the plans and no new participants will enter these plans, limiting future liabilities. The following projection shows the issue is manageable but the unfunded liability will take years to wind down unless actual return rates are higher and/or the company increases their contributions. The pension does not include the 401(k) and retirement plans. The company modeled an expected rate of return in excess of 8% in the past. This is aggressive and higher than the discount rate so we ran the analysis with a 6% return.