Wednesday, March 05, 2008

Bank Dividend Increases On Hold

The Globe and Mail, John Heinzl, 5 March 2008

Are bank dividend hikes drying up?

For years, Canada's banks raked in ever-increasing profits, which they shovelled back to shareholders in the form of rising dividends. Royal Bank of Canada, the largest of the Big Five, raised its dividend at a sizzling 20-per-cent pace over the past five years. Bank of Montreal, the fifth-biggest bank by market value, raised its dividend by about 18 per cent annually.

But suddenly, banks aren't in such a hurry to share the wealth with investors. That's because, with the credit crisis hammering their earnings and the economy in a downward spiral, there's less wealth to share. And it may get worse before it gets better.

Yesterday, after warning it will miss its 2008 profit targets, Bank of Montreal left its quarterly dividend unchanged at 70 cents a share, the third consecutive quarter at the same rate.

That broke with its well-established pattern over the past four years, when it raised its dividend at least once every two quarters.

BMO isn't the only bank putting dividend hikes on hold.

Last week, RBC also held its payout steady after first-quarter profit tumbled 17 per cent, the first time since 2004 that it went more than two quarters without a hike. As expected, Canadian Imperial Bank of Commerce and Bank of Nova Scotia also didn't raise their dividends.

The only bank to raise its dividend was Toronto-Dominion Bank, which declared a token 2-cent increase.

By forgoing dividend increases, “banks are giving you a message that things are not as good, and that paying out a higher dividend is not the best use of their money right now,” said Norman Levine, managing director Portfolio Management Corp., which holds BMO and National Bank of Canada shares.

“In the long run, the Canadian banks are probably your best … investment in Canada. However, they do go through periods where they're awful, and this is one of those periods,” he said.

If the banks are indeed heading into a period of stagnant dividend growth, it wouldn't be the first time. During the recessions of the early 1980s and early 1990s, some banks went for years without raising their payouts. RBC's annual dividend didn't budge from 1982 to 1986, or from 1991 to 1994. And in the 10 years from 1983 to 1992, BMO raised its dividend only twice.

That serves as a reminder to investors that the juicy dividend hikes of recent years aren't necessarily the norm.

David Cockfield, fund manager at Leon Frazer & Associates, remembers the early 1990s when trust companies were imploding because of soured real estate loans and people were worried that one or more of the banks could also bite the dust.

This downturn is relatively mild in comparison, but he thinks it could be up to a year before banks start increasing their dividends again.

“What the lack of increases is telling us is that, looking ahead, the banks are not seeing earnings growing the same way they have over the last five or six years. We're looking at a period of flat to down earnings,” he said.

The last thing a bank wants to do is boost its dividend too high, only to find out that its payout ratio – dividends divided by profit – has exceeded the bank's internal target. That could force the bank to cut its dividend to bring the ratio back into line, Mr. Cockfield said.

Bank dividend cuts are rare in Canada, but several U.S. financial institutions, including Citigroup and Washington Mutual, have slashed their payouts because of the subprime loan debacle. According to Standard & Poor's, the number of companies that decreased their payouts in January and February rose to 24, up from eight in the same period a year earlier. That's out of about 7,000 North American-listed companies that report dividends to S&P.

On a brighter note, 382 companies raised their dividends, although that was down from 445 in January and February of 2007.