This year will see more dividend cuts than at any time since 1938, when dividends were slashed by more than 36%. Standard & Poors’ estimates that cuts in 2009 will exceed 22%. While I am not prepared to offer a specific number, I think S&P’s estimate will prove to be low.
The much heralded strong balance sheets of the last few years are proving to be not that muscular after all. Preservation of cash flow has become especially crucial when questionable assurances of available financing and/or refinancing are viewed in the context of profits diving faster and further than anyone would have guessed. What was considered prudent financial leverage a couple of years ago is now looking, as the British say, pretty dodgy.
GE, Pfizer, Dow Chemical, Motorola, JP Morgan and a host of other major financial institutions, among others, have all decided to keep cash in-house rather than share it with stockholders. Many more companies will follow, especially now that such once well-regarded companies have been leading the pack.
Once upon a time a company’s board and management would have thought it shameful to reduce the dividend. Indeed, it was considered a real blackmark to have an irregular dividend, so companies would pay “extra dividends”, dividends not considered as a continuing payout. That way, when the extra wasn’t paid, the regular dividend was still maintained and the company’s reputation among investors was not marred. Companies with long, continuous strings of dividend increases were viewed as “dividend aristocrats”
In my many years as a corporate director I argued for modest payouts with emphasis on small annual increases. Becoming a dividend aristocrat was a worthwhile objective. One might reasonably expect a long, uninterrupted record of ever higher dividends to be rewarded with a higher valuation for a stock. The bluest of the Blue Chips were in that class.
If there were insufficient attractive investment opportunities for reinvesting cash flow I argued in favor of stock buybacks as a more tax efficient return to shareholders. In fact, stock buybacks have been an increasingly important use of cash flow over the past decade. Analysts were able to point to a put below the market stemming from large buybacks. What is not said in the news about dividend cuts is that stock buybacks are also being slashed or eliminated. A double whammy for stock prices.