Dividends Take a Dive

Traditionally, common stock dividends contribute roughly one half of the total return generated by the stock market. However, these are not traditional times. In the past six months, a large swath of the market has been hit with a double whammy: a huge devaluation of common stock and cuts in dividends amounting to billions of dollars in lost shareholder value.

How much was lost? And which companies suffered? In the third quarter of 2008, 138 companies, amounting to $22.5 billion; fourth quarter, $15.9 billion; first quarter of 2009, $16.6 billion—and that was in the first 50 days alone. While an estimated two-thirds of the dividend cuts came from banks, the list also includes the New York Times, Precision Castparts, Great Plains Energy, General Electric, Dow Chemical, and CBS. Locally, U.S. Bancorp cut its quarterly dividend 88 percent, to 5 cents per share from $42.5 cents. Wells Fargo also cut its quarterly dividend to 5 cents from 34 cents per share.

Paul Stocking, portfolio manager of Minneapolis-based RiverSource Investments’ Dividend Opportunity Fund, a $1.1 billion mutual fund that focuses on large-capitalization, income-oriented stock, gives Twin Cities Business his take on the situation.

In the past couple quarters, we’ve seen a record number of dividend cuts by companies. What’s driving that?

Stocking: It varies by company. The biggest sector has been in the financial services area, particularly banks. It’s because of the need to preserve and grow capital to offset credit losses and other balance-sheet issues. A lower dividend saves a substantial amount [of money]. In many cases, the banks were not earning their dividend prior to the dividend cut.

To what extent does the market anticipate a dividend cut?

Stocking: It can vary, but in the case of the banks, there has been a lot of anticipation of dividend cuts. The first round included very weak banks; those were widely anticipated. The second round started with J. P. Morgan [NYSE: JPM] choosing to cut their dividend more to maintain or grow their capital. They didn’t have to; their capital levels were high enough where they could have maintained it, but they felt it was strategically better for them to cut the dividend. That really opened the door for all the banks to cut their dividends. Now, in the case of banks, the market is anticipating that almost no bank will be paying anything more than a nominal dividend.