Are Dividends in Dire Straits?

BusinessWeek has an interesting article on the state of dividends by Ben Steverman. Are Dividends in Dire Straits?

Many companies, especially banks, have had to slash or eliminate payouts. How low will dividends go?

Companies continue to slash dividend payments to shareholders, as firms rush to hold on to capital amid the continuing credit crisis and deteriorating economy.

The latest to slash its payout is financial firm State Street (STT), which on Feb. 5 dropped its quarterly dividend from 24¢ to 1¢ per share. On the same day, auto and truck dealer Penske Automotive Group (PAG) suspended its dividend.

In the past two months, corporate boards have cut dividends by half or more at Macy's (M), Pfizer (PFE), and Constellation Energy Group (CEG). Dividends have been eliminated—or nearly so, with payouts slashed 96% or more—at Bank of America (BAC), Motorola (MOT), and Citigroup (C).

The trend is disturbing to investors, who especially appreciate dividends at times of economic uncertainty.

"Investors are really looking for yield, and they're looking for safety," says Bruce Bittles, R.W. Baird's chief investment strategist. "Companies that cut their dividend take away both."

Howard Silverblatt, Standard & Poor's senior index analyst, says actual dividend payments by firms in the S&P 500 index plunged 23.9% in January. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).) "It's going to be a bad dividend year," he says, predicting 2009 will be "the worst in at least 50 years."

Financial Crisis Is a Huge Blow
Thanks to the financial crisis, it's no surprise that many of these dividend-cutters are banks. To make up for large losses and shore up their capital, financial firms aren't just cutting dividends but also taking federal government bailout money.

Dividend cuts may actually be a positive for already-battered financial firms. A dividend cut can help avoid other less attractive options for raising cash, such as issuing new stock, which dilutes current shareholders' stakes. "It's the lesser of two evils," Plesser says.

The S&P Dividend Aristocrats is a list of 60 large-cap U.S. firms that have raised dividends every year for the past 25 years. The list will look very different next year. By announcing dividend cuts, several prominent firms, including Bank of America, State Street, Fifth Third Bank (FITB), and Pfizer, are set to break their streaks. Newspaper firm Gannett (GCI) is also likely to lose its crown; on Jan. 30, the firm said its board would consider a dividend cut later this month.

Still, many less troubled firms are hanging on. A healthy number of firms continue to raise dividends, even if shareholders are seeing smaller increases. AT&T (T) claimed its 25th annual dividend increase in December, when it inched up its payout by 2.5%. The year before, AT&T's dividend had risen 12.7%.

In this environment, any increase in dividends, no matter how small, can help inspire the confidence of market players desperate for some safety and stability. However, the overall trend of falling dividends gives investors one less reason to get excited about stocks these days.

Disclosure: The Div Guy owns shares of BAC, PFE and C at the time of this post.

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