Risk & Compliance

Dividends Are Deemed Expendable

Several companies, citing the poor economy, make big cuts in shareholder payouts.
Stephen TaubFebruary 13, 2009

A growing number of companies are slashing their dividends to preserve cash. Many have had a long tradition of providing the payouts, which had enabled them to attract conservative, loyal buy-and-hold investors.

For example, The Dow Chemical Co., which has paid shareholders cash dividends every quarter since 1912, on Thursday said it cut its payment by 64 percent, to 15 cents per share from 42 cents. The company cited a confluence of factors, including uncertainty in the credit markets, unprecedented lower demand for chemical products, the ongoing global recession, and pending business issues.

Dow figures to save $1 billion from the move, Reuters reported. The company is also cutting 5,000 jobs, selling off some businesses, and trimming capital spending.

Harley-Davidson said it slashed its dividend 70 percent, to 10 cents per share from 33 cents. “The board’s action on the first-quarter dividend reflects our objective to return value to shareholders, even as we prudently manage the business in these challenging economic times,” said CEO Jim Ziemer.

Harley-Davidson has paid a dividend every quarter since it began declaring dividends in 1993. The cut will save the motorcycle maker about $50 million during the quarter.

Kelly Services said it will temporarily suspend the payment of its quarterly cash dividend on its Class A and Class B common stock. The move ends a 47-year tradition at the temporary staffing company.

“The board has determined that the suspension of the cash dividend is prudent given the economic turmoil the global economy is presently experiencing and its impact on our business,” said Carl Camden, CEO. “Despite this action, we continue to believe that dividends are an important element in delivering value to our shareholders and our board intends to re-address payment of a dividend as the economic environment improves.”

These are not isolated events. Standard & Poor’s said in a recent report that it expects 2009 S&P 500 dividends to decline 13.3 percent, the worst annual decline since 1942, when dividends fell 16.9 percent. That would work out to a $33 billion decline in dividend payments this year compared with 2008.

“Given the current economic climate and growing concern over dividend cuts, dividend increases for the S&P 500 companies are expected to slow in 2009,” said Howard Silverblatt, senior index analyst at Standard & Poor’s. “Unless companies believe that their financial future will improve, their need to conserve cash will outweigh their desire to pay dividends.”

Last year, 62 S&P 500 companies decreased their dividends by an aggregate $40.6 billion, with 48 of the decreases coming from financials ($37 billion). Over the previous five years (2003-2007), there were only 12 dividend decreases in the financial sector, amounting to $5.1 billion.

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