Monday, June 05, 2006

More Cdn Banks Seen Lifting Dividends

Duncan Mavin, Financial Post, 5 June 2006

Investors could see more banks following the lead of Bank of Montreal by hiking their targeted dividend payout ratios, say the authors of a new report that trawls though 175 years of BMO's dividend history.

Canadian banks have been reinvesting their earnings to pay for growth plans over the past 30 years, said Stephen Foerster, a professor at the Richard Ivey School of Business at the University of Western Ontario in London.

But that could be about to change because of a lack of growth opportunities in a mature Canadian banking sector and because retiring Baby Boomers want steady dividend increases rather than capital gains, said Mr. Foerster, who is the co-author of a report that looks at trends in Canadian dividends and uses data about BMO from as far back as the 19th century.

BMO surprised analysts late last month by announcing it aims to pay out between 45% and 55% of earnings to shareholders in the form of dividends, an increase of 10 percentage points on its previously stated target, and the highest level of any Canadian bank.

But the new target doesn't even come close to the average amount BMO has paid out over its entire history, Mr. Foerster said.

Before 1975, BMO's average dividend payout ratio was 80%, more than double that for most Canadian banks today.

Mr. Foerster and co-author Stephen Sapp cross-checked the historic dividend payment trends they found in BMO's records with other major Canadian banks and found they were broadly similar.

Now, Mr. Foerster said, "I wouldn't be surprised if other banks start to raise their payout targets as well."

Anil Tahiliani, head of research with McLean & Partners Wealth Management Ltd, said all the Canadian banks are in a similar dividend cycle and BMO's rivals will likely increase their dividends too.

Dividend hikes would be in line with the requirements of ageing investors.

"As the clients get older we see a switch as they go into more of a capital-preservation mode," he said.

Retiring Baby Boomers, who are expected to live much longer than previous generations, could change the nature of investing. There will be a greater number of older investors who want steady income and a safe bet rather than growth that might require riskier strategies such as big acquisitions.

"People are saying that if I can make equal to or better than inflation based on my dividend then they'll be happy with that, knowing that there isn't much downside," he said. "Even in a slowdown, [the banks] still make money. Their earnings aren't as cyclical as other industries and their fees are still going up."

Mr. Tahiliani does not own BMO, but he does own Toronto-Dominion Bank and Bank of Nova Scotia, because he likes their U.S. and International growth plans. He said banks that don't have similar plans outside of Canada will become "more or less a utility stock," with little risk, but little prospect of capital growth either.

Genuity Capital Markets analyst Mario Mendonca said BMO and Canadian Imperial Bank of Commerce in particular lack significant growth plans and that could be behind dividend increases at both banks during the latest round of quarterly earnings that has just been completed.

"What BMO might be saying is that retail banking is spewing out so much capital and we can't necessarily put it back to work," said Mr. Mendonca.

Not only that, he said, but with a growing array of wealth management products, especially life insurance products, offering steady income streams for retirees, banks could be under more pressure to increase dividends.

Also, he said, with interest rates moving higher, the banks will be tempted to raise their dividends to be more competitive with bonds.

"If people see banks as being bonds with a little bit of potential then you have to raise your dividend," said Mr. Mendonca.

Meanwhile, John Kinsey, who helps manage about $800-million at Caldwell Securities, offered another reason for dividend payout ratios at some banks to creep upward.

When a bank has a less-than-stellar quarter, he said, "token" dividend increases are given to thank investors for their patience.

Messrs. Foerster and Sapp's report, "The Changing Role of Dividends," is to be published in the Canadian Journal of Economics this year.