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Another FTSE 100 dividend is cut, but here’s why I’d buy

A top FTSE 100 dividend stock might not seem such a good investment these days. Many companies have suspended their dividends due to the Covid-19 outbreak, with Smurfit Kappa (LSE: SKG) the latest.

The packaging maker’s first-quarter update on Wednesday revealed revenue of €2,194m, with EBITDA of €380m from a 17.3% EBITDA margin.

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As a supplier of essential products, the firm’s facilities were all operational during the quarter. CEO Tony Smurfit said that, despite the coronavirus uncertainty, “SKG remains very well positioned both financially and operationally.”

FTSE 100 dividend cut

Even though the balance sheet looks fine, the firm has joined the ranks of FTSE 100 dividend payers cutting the cash. It will now not pay the previously proposed 2019 final dividend. The board “will make an assessment of the quantum and timing of a dividend later in the year.”

Investors seem reasonably happy with that action, and the shares have barely moved in response. Since the start of the crash, Smurfit Kappa shares have lost 20% of their value. That’s a bit behind the FTSE 100’s 25% drop. And I think it makes a good company look like an even better long-term buy now.

But was it really necessary to cut another FTSE 100 dividend? Perhaps not. Yet I like to see a company putting prudence first and prepared to withdraw its dividend in advance of a potential liquidity threat. So many wait for a crisis to hit before they suddenly think maybe they shouldn’t have been handing out so much cash for so long.

Short-term suffering

For our companies to survive and prosper over the long term, I think we all should be happy to suffer a little short-term pain now.

A quarter of FTSE 100 bosses are shouldering some of the  burden. According to an analysis by the High Pay Centre, 25 FTSE 100 CEOs are reducing their pay. Of those, most have taken a 20% cut, in line with the drop that’s hitting furloughed employees. Rentokil Initial‘s CEO has even gone further with 35%, putting the difference in an employee fund. I wish all company CEOs showed ethics like that.

Anyway, is Smurfit Kappa a good long-term FTSE 100 dividend buy now that there isn’t going to be one? Fellow Motley Fool write Royston Wild pointed out that the forecast 2020 dividend yield stood at a modest 3.2% back in February. But that doesn’t tell the whole story.

In a good dividend stock, I want a conservative approach with solid cover by earnings. And Smurfit’s dividend has average around two times cover in recent years. The dividend is also progressive, which is another thing I like to see.

Top FTSE 100 dividend

The Smurfit share price has fallen since Royston wrote, and the forecast 2020 dividend would now yield around 4%. We have no idea what will happen to the 2020 dividend now, so that forecast has to be disregarded. But I really can’t see Smurfit Kappa suffering too badly.

I expect it will be back to its expected dividend levels before too long. If not this year, then almost certainly next, so I think there’s a good yield to lock in now.

Smurfit Kappa must be one of the best FTSE 100 dividend stocks that’s not paying a dividend right now, if you know what I mean.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.