Why Are Companies Hesitant to Cut Dividends?

With strong balance sheets and positive cash flow at such a premium in our current market, why are companies so hesitant to cut their dividends?

Over and over as companies have been announcing their earnings report and conference calls this quarter, the question is asked whether a dividend cut is in the works since cash is tight and earnings forecasts are down. Repeatedly, management has stressed that they will work to uphold the current dividend. This comes even though the dividend will compromise a larger percentage of earnings than it has historically.

Some examples: WHR confirms that it plans on paying its dividend and the stock rallies after opening down @10% after its earnings release. CAT forecasts trough earnings of $2.50 a share but maintains dividend even though it calculates to 65% of earnings. NYX announced that it will maintain its dividend, with its 5% yield, but to conserve cash will suspend buybacks.

These actions though can be contrasted to private business owners that I have spoken to who have generally told me that they have and plan to cut their personal spending and focus on building cash reservoirs, to both reinvest in the business in the future, and as a security for economic deterioration.

The argument for continuation of current dividends is that it represents a stable business. Also, shareholders technically value stocks based on their future earnings, so dividends are the form of realizing those earnings.

Personally, I feel that just like earnings can't be expected to be linear, neither can dividends. Therefore, dividend cuts should be utilized more often as a method of bolstering cash flow and liquidity, and valued on their long term gains, rather than being frowned upon by the markets.

This is obviously just my opinions on the matter, and I am eager to hear other comments on the matter.

Disclosure: None.

Comments

[DonSuper:]

I think you are right, it doesnt make any sense to try to keep a dividend when the company has to issue debt at high cost to fund it. That is bad management, but there are companies that have acted responsibly and reduced or cut the dividend until conditions improve.

In my opinion, other countries have better policies than US companies, where they usually pay a % of earnings (e.g. 50%). I think that is a lot smarter.

Feb 10 03:54 PM

[k45:]

Oftentimes company stock prices are held up by the dividend. Investors seek good, reliable, stable investments. Companies that have built a history of solid dividends for 10, 20, 30 years are hesitant to destroy that history for a short term problem and lose their reputation. Also, many older investors depend on the income from dividends. Dropping the dividend will send those investors away, hurting the stock price even more.

That being said, I am concerned about companies that borrow money to pay a dividend. It takes quality management to find the right balance. For some companies, it is the right approach. For others, it's covering up serious problems.

Feb 11 08:41 AM

[henarl:]

Why? Well, as other commentors have stated, top company executives are usually also big stockholders and/or have big stock option positions. When a company cuts or eliminates it's dividend, it almost always results in a drop in share price and these execs don't like that.

Feb 11 03:00 PM

[User 95273:]

Diviend cuts in tough times or any time are treated negatively by the market even when it makes sense to cut the dividend. A better dividend policy by any Board of Directors would be to set a percentage of dividends to earnings and not use a fixed amount. For example 10% of earnings instead of $ 2.00.

With this process, the dividends follow earnings, does not create cashflow prolems, and the board can still dole out more in special dividends when conditions allow.

Those insiders with big positions would be more "shareholder friendly" if this was the process.

I don't understand the reason for buyback programs, why not just reward shareholders with special dividends instead?

Feb 12 09:29 AM

[cellorder:]

I would love to find out how many billions were spent by the S&P 500 companies in 2008 and 2007 to purchase their own stock for non- business purposes. I bet they all wish they had distributed reasonable dividends instead and had the excess cash on their balance sheets. If a company wants to create value for long term investments, why do they excessively buy back their own stock so it props it up for those short term investors who then sell the stock, penalizing the long term investors. Take a look at symbol HOG (how ironic) and compare how much stock they bought at over $50 a share and see what it is worth today. If they had saved the cash, in my opinion, they would not have had to cut their dividend. GE is another spectacular example!

If companies had managed their businesses as soundly as they thought they managed their stock markets, the S&P and the Dow would not be where they are now! Boards of Directors (and there are many whose names should also be Mr. and Mrs. Made Off) bowed to senior management by pumping up their stocks so their excessive stock options would be in the money.

On Feb 10 09:29 AM chistletoe wrote:

> upper management typically owns a lot of their own company's stock.
>
> they finally are realizing that we are now looking at their pay and
> their bonuses more carefully.
> but they can still steal from the company this way.

Feb 19 12:57 PM

[M.R. Henderson:]

there is this idea of serving shareholder value (and with the future very uncertain, exec pay excessive, etc...)

who could mention a stock that has cut dividends and exec pay?

Apr 27 08:06 PM

[chistletoe:]

upper management typically owns a lot of their own company's stock.
they finally are realizing that we are now looking at their pay and their bonuses more carefully.
but they can still steal from the company this way.

Feb 10 09:29 AM