Risk & Compliance

Pay Attention

Cutting dividends is a difficult decision for CFOs — but the aftermath could be better than expected.
Tim BurkeOctober 6, 2008

When it comes to penny-pinching, slashing dividends is a dramatic move for a listed company. But recently a string of firms — from big banks down to pub companies — have hit shareholders in the pocket by doing just that.

At Redrow, a £650m (€817m) UK housebuilder, the reasons for cancelling a full-year dividend in September were compelling. Even after laying off some 40% of its staff this year, the scale of the downturn in the UK’s housing market meant that the company needed to save yet more money. According to CFO David Arnold, if the group were to increase its dividend by 20%, as it had done over the past five years, it would have been paying out around £30m. For Redrow, the CFO adds, that’s “a lot of cash.”

But the decision wasn’t easy. Given the importance of dividend payments to many shareholders, cutting the payout called for “a lot of soul searching” at board level, Arnold says. A dividend cut should always be in a company’s “armoury,” though its deployment is “not something that one would ever take lightly.”

Despite a reluctance to cut dividends, the aftermath needn’t be unpleasant for either companies or their shareholders. Earlier this year, Graham Secker and Charlotte Swing at Morgan Stanley studied 118 dividend cuts from London-listed companies over the past 15 years. They discovered that the median company that cuts its dividend outperforms the market by 14% in the subsequent 12 months. By the end of the second year after a cut, outperformance rises to 20%. Furthermore, the best performances were by companies that cut their payout by the greatest percentage. Their conclusion? “Our analysis suggests that such an option is often best in the long run for both the corporate and investors.”

That’s certainly what Redrow’s finance chief hopes. If the company can save cash and reduce debt now, Arnold argues, it will be well placed to take advantage of new opportunities in the market for land, which he hopes will create greater shareholder value further down the line. Investors might agree. Within two days of announcing its dividend cut — when it also released preliminary results and confirmed a new banking facility — the company’s share price rose by 18%. Proof, perhaps, that a pay cut isn’t always bad.

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