Risk & Compliance

The Incredible Shrinking Dividend

The trend develops into a rage, as PNC, HSBC, and International Paper take the step that GE took last week. And S&P sees a 2009 fall of 22.6 percen...
Stephen TaubMarch 2, 2009

The pace of dividend cuts by cash-hungry firms picked up, with three major companies drastically paring their payouts on Monday.

The rash of cuts – by PNC Finanical Services Group Inc., HSBC, and International Paper – came on top of General Electric’s long-anticipated 68 percent reduction on Friday. Taken together as part of a longer-term trend, they underscore the need companies feel to stay liquid, even at the risk of tweaking expectant investors who long have seen dividend-payers as safer havens during rough times.

PNC will slash its quarterly common stock dividend by 85 percent, to 10 cents from 66 per share.”We are taking this proactive step to build capital, further strengthen our balance sheet and serve our customers in an unprecedented and uncertain economy,” said chairman and CEO James E. Rohr. “Our Board recognizes the importance of the dividend to our shareholders. While our overall capital and liquidity positions are strong, extreme market deterioration and the changing regulatory environment drove this difficult but prudent decision.”

British financial giant HSBC trimmed its payout to 10 cents, 44 percent lower than the prior 18-cent rate, as one of a number of steps connected with a decline in profitability. “After 15 years of double-digit dividend growth, we did not make the decision to lower the dividend lightly,” the company said. “Very careful consideration was given to the current operating environment and the increased uncertainty over both the supply of capital required in an increasingly volatile financial world and a pro-cyclical regulatory capital framework.”

International Paper’s cut was from 25 cents a share to 2.5 cents. The forest products giant said that the steep reduction will allow the company to preserve about $100 million in cash on a quarterly basis, for use in reducing debt more quickly. “While our cash balances and cash flows remain solid, we believe it is prudent to manage cash conservatively in this uncertain economic environment,” said chairman and CEO John Faraci. “This decision, which reflects our strong commitment to maintaining our current credit ratings, is a proactive step to maximize our financial flexibility, along with our earlier decisions to reduce capital investment, decrease overhead spending and headcount, and freeze salaries.”

GE’s reduction was to 10 cents from 31 cents. Former the largest dividend payer, with the cut it ranks tenth, according to Standard & Poor’s.

In late February, S&P predicted that the S&P 500’s dividends will decline 22.6 percent this year, leading to the worst annual decline since 1938, when dividends fell 36.3 percent.

“Unless companies believe that their financial future will improve, their need to conserve cash will outweigh their desire to pay dividends,” said Howard Silverblatt, S&P’s senior index analyst.