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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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December 3, 2007 12:01 AM ET
Credit-market turmoil could lead cash-strapped companies to start slashing dividends—a move most CEOs and CFOs are loath to make. Among financial institutions, especially those exposed to the troubled mortgage markets, dividend cuts have begun to surface. Freddie Mac, the second-largest U.S. mortgage company, last week confirmed it would halve its annual dividend, to $1, after warning investors of that possibility when it reported a $2 billion loss during its third-quarter earnings call the previous week. The company also announced it would issue $6 billion in preferred stock because it was in danger of not having enough capital to cover its mandatory reserves for mortgage commitments. The day of the earnings call, Freddie’s stock fell 29%. Only one other company, Mortgage Guarantee Insurance Co., has reduced its annual dividend payout this year—to 10 cents from $1. Howard Silverblatt, senior index analyst at Standard & Poor’s, said he would not be surprised if financial companies continue to decrease dividends. And even if they don’t, he said, many are likely to stop raising their dividend. Either way, “investors will feel it,” said Mr. Silverblatt, because financial companies account for 30% of total dividends paid by the S&P 500. He noted that all eyes will be on General Electric (the largest dividend payer) and Citigroup (the third-largest payer) to see whether they announce dividend changes. GE typically announces its dividend rate in mid-December, and Citigroup, now raising capital to help it through the credit squeeze, has posted its dividend rate in mid-January in recent years. GE did not respond to a request for comment. Citi said in its most recent 10-Q it had “no plans to reduce its current dividend level.” Depending on how the economy fares, non-financial companies may also consider either reducing or not increasing their dividends. Mr. Silverblatt noted that consumer discretionary stocks have been under pressure, and that health-care companies, always on the hot seat in an election year, could also face many unknowns. Investors, including some big institutional types, tend to get hooked on those annual increases, Mr. Silverblatt said. “At some point you’re stuck if you increase dividends several years in a row.” Bahl & Gaynor, a separate account manager in Cincinnati with $3.2 billion under management, only invests in dividend-paying companies, and prefers firms that pay an increasing dividend every year, said portfolio manager Matthew McCormick. When a company does not increase its dividend, he said, “that is a red flag that there is a problem at the company, not only now, but in our opinion, for several quarters to come. That’s something we believe is not worth owning if it happens.” That’s why some companies will do almost anything to stave off a dividend cut. “I’m not sure it’s the last resort, but it’s certainly not the first resort,” said Bruce Nolop, CFO of Pitney Bowes, whose company has consistently increased its dividend for the last 25 years. “If you cut your dividend, shareholders can infer that you’re less confident about the future prosperity of the company.” Many mutual fund and pension fund managers are required by their charters to attain a certain dividend yield with their stock portfolios. If a dividend is cut, often those investors will have to drop the stock from their portfolios, regardless of their overall view of the stock. “There is definitely an enormous stigma associated with cutting your dividend,” said Steven J. Foresti, managing director and head of the investment research group at Wilshire Consulting. “But what strikes me as very odd is why this is true even when everyone knows a company is having financial, cash flow or liquidity problems. Recent events seem to support the notion that investors applaud moves to save the dividend, even when those moves may in fact make little long-term financial sense.” Last week, the Abu Dhabi Investment Authority invested $7.5 billion in Citigroup. In exchange, the sovereign investment fund will receive convertible stock yielding 11% annually. Citi, meanwhile, pays $10.8 billion in dividends annually. The “stickiness” of dividends has caused them to become less popular as a way to return capital to shareholders. Today, 388 companies in the S&P 500 pay dividends; in 1992, that number was 436. That’s notable, Mr. Silverblatt said, because even though the U.S. was in a recession and many companies were going through a poor earnings period, firms wanted to satisfy dividend-happy investors. One reason that companies may be more reluctant to issue dividends is that buybacks have grown more common. At last count, companies have announced $768 billion in share buybacks so far this year, according to Birinyi Associates, compared with $603 billion at this time a year ago. Companies bought back a record amount of shares last year, and are expected to surpass that record this year. “We think stock buybacks are a much more flexible tool than dividends,” said Mr. Nolop, adding that debt rating agencies look at dividends as a much more permanent use of capital than a stock buyback. “So from their perspective, the rating agencies would rather have you buy back stock than pay a dividend.” FW
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