Robert Sedran, an analyst from National Bank Financial, writes about the possibility of Canadian banks putting dividends on hold. Specifically Royal Bank (NYSE:RY), TD Bank (NYSE:TD), BMO (NYSE:BMO), and CIBC (NYSE:CM) may forego dividend increases this quarter as their profits decline, he writes. He goes on to say that Canadian banks typically raise dividends twice per year, but they may postpone increases because average profits before one-time items should be down about 1.4%. He will view any increases as a bullish sign.
It will be very interesting to see what really happens here. Canadian banks have been raising dividends at fabulous rates over the past five years. But, there is no doubt that the operating environment for these banks has now softened. Currently, the capitial markets, wealth management, loans including subprime, and the general economy do seem soft when compared with the last few years. In the past, these banks have all shown that even in tough economic times, they can continue to raise dividends, and average out making more money on a year to year basis. It is fee-based revenue and retail banking that probably really prop them up in difficult times.
The Royal Bank, for example, had a target payout ratio (dividends paid divided by earnings per share) in 2007 of 40-50%, and ended up coming in at 43%. For 2008 its target remains at 40-50%. As you can see there is a little wiggle room in those numbers. Earnings can be flat, while dividends continue to grow, and this could continue as long as the bank's outlook remains in the desired range so that the pay out ratio comes back down into the desired range. On the other hand, the Bank of Montreal may be getting close to the top of its targeted range of 45%-55%, especially when you include recent one-time items.
This analyst's viewpoint and comments are an indication that, for this year, he believes that the '2 times per year' dividend raising habit for these four banks, may be a thing of the past. He does not seem to be doubting an annual raise all together for the banks.
In a separate article on the same topic, analysts are doubtful that the Bank of Montreal will raise its dividends at all in 2008.
TD vs. BMO vs. RY vs. CM 1-yr chart: