In fact, in the last three recessions, dividends fell by an average of just
8% while profits dropped 35%. Dividends account for over half of long-term
equity returns and form a crucial part of the return to shareholders. As a
result, the management of companies that have suspended or reduced dividend
payments have been chastised by investor activists for decades.
But life has changed and what a difference a year makes. 15 months ago only
3% of FDs would consider cutting the dividend, according to the Deloitte CFO
Survey. A year later, in March, 30% of FDs indicated they had already or planned
to reduce them – a ten fold increase. Since then we have seen a host of blue
chip companies slash dividends, and investors and credit providers are braced
for more to justify doing so.
What has changed? It may be that the speed and severity of the credit crunch
has changed the traditional hostility of shareholders to dividend cuts.
Investors are more likely to favour companies with strong balance sheets than
those paying dividends or buying back shares.
Certainly companies need to look at all options for maximising capital
strength (or minimising capital weakness) and for preserving cash. Reducing the
dividend, possibly to zero, for a year or so may be the better option, or may be
the only alternative remaining. Equity holders may be the only source of new
capital in the near term. The current nature of the market, particularly the
reduced availability of credit, means that a company’s share price may even rise
following announcement of suspension or reduction of dividend payments – but do
not bank on this.
Cutting the dividend is an option, but companies pursuing this need to
clearly and robustly articulate that this is a short-term solution that supports
a long-term strategy. The rationale for the dividend cut needs to be explained
to multiple stakeholders as banks, shareholders and ratings agencies may all
perceive a dividend cut differently. Understanding the possible reaction of each
is fundamental, because pleasing all parties equally may be impossible. The
prioritisation of stakeholders, whether that be lenders or investors, will be
But what are the longer term implications of reducing or suspending dividend
payments? In the long run, a company that pays no dividend may be regarded by
many investors as worthless.
Margaret Ewing is a partner and vice-chairman at
Deloitte, and former CFO at BAA
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