Bank Dividend Deja Vu
I know that some of you are more keen that others on this stuff (see prior representative post “Deja Vu with a Cobalt hue” December 15-08). Here is a Tweet I did on Twitter on February 23rd:
“If BMO and BNS dividends get cut in half (which I don’t expect) they’ll still be yielding 6% and 4% respectively. Still higher than last yr!”
And this from a column in the DTM on March 7th (yesterday):
“Plus, even if all of Canada’s Big Banks did cut their dividends in half, their dividend yields would merely fall back to where they were in mid-2008….”
In the wake of the dividend cut at Wells Fargo (WFC:NYSE) I’ve been thinking about what would happen to Canadian bank or insurance stocks if they were to follow the same course of action.
For all of the focus on high dividend rates at Bank of Montreal (BMO:TSX, NYSE) and ScotiaBank (BNS:TSX), Manulife (MFC:TSX) is yielding 10.2% while SunLife (SNL:TSX) is at 8.9%.
You have to wonder if high payout ratios are going to become a competitive disadvantage for the Canadian financial services industry. According to a Bloomberg story, Wells Fargo and the rest of the Big 5 American banks that received TARP funds were pressured by regulators to cut their dividends. Whether it be for optics or life preservation reasons, it makes sense in hindsight.
Do Canadian Banks and LifeCos need to pay 7%, 8%, 9% or 10% dividends to keep us hanging around? With bank preferred shares being issued at higher than 5% yield these days, you might suggest that the common shareholders deserve more than that given their capital structure ranking…but since prefs have always paid a bit higher yield than commons and don’t provide any real opportunity for capital appreciation that argument doesn’t hold water.
The question of a dividend cut in Canada is all about message management. What’s the rationale, can you get that point across to the marketplace, and will they believe it?
Solvency? Lowering the cost of capital at the bank? Removing the need to issue more common / pref equity or Tier 2 capital for the rest of the year? The regulator made us do it?
I’m not sure that financial services shareholders NEED a high payout to hold the various shares. The flipside is that many of these securities are held by retired people who live off the income. Not a percentage but the actual cash payout; the fact that bank dividends have been raised for years (well ahead of inflation) removes some guilt here.
If you are nervous about the chance of a depression, you might actually want the banks and lifecos to keep their free cash flow to themselves to hopefully ensure they stay in business. As much as “higher is better” as Wardo used to say about i-banking bonuses, the time has come for Finance Minister Jim Flaherty, Bank of Canada Governor Mark Carney or OFSI Head Julie Dickson to send up a trial balloon about dividend cuts being a good idea. Portray it not as a solvency issue but one of competitive disadvantage; if other global banks are paying out dividends of 1% or less, Canadian banks would be ill-advised to be as off-market as they currently are.
For my money I’d choose the OFSI Head for the role: this shouldn’t become a political issue, but CEOs of the big 7 financial institutions are in a terrible “Prisoners’ Dilemma” situation right now. No one wants to be the first. Our regulators should take the lid off the kettle and let some of this pent up steam blow off.
Things aren’t getting any better in the world economy. The health of our financial system has helped us avoid some of the pain they are experiencing in the USA. Let’s preserve what’s working.
The time has come to give the backbone of our economy some political cover and call for a reduction in dividends.
UPDATE:
Here is the Seeking Alpha link.
MRM
(we own BMO, BNS and TD in our household)
Here are the comments I made on prior articles of the same vein on the Seeking Alpha web site:
“Analysts, including Mr. Hardy, have substantially underestimated Canadian Banks earning power… Calls to cut dividends are generally misguided and are a reaction to current market price declines. A long term perspective and a turnaround in the markets towardsthe latter part of 2009 is essential when making such calls. Banks don’t want to regret a move to cut dividends now if it would undermine investor confidence and lead to further unwarranted price reductions. Headline grabing commentary are typical of analysts, whose reputation has been tarnished of late.
Should Bank of Montreal have deeper financial issues with their balance sheet then be it… but stop second guessing as you are creating a constant fear that will be self fulfilling even if wrong. The market is spooked as it is and you are adding fuel to the fire.
Canadians have an inherent inferiority complex which leads to inappropriate and costly conclusions and behaviour at times. Some Canadian banks felt that in order to grow, they need to invest in the US rather than chart a policy of growth independant of the big boys… that served them well!!! Investors see the drubbing of the US Banks… and follow the course north of the border… BNS has show us that there are other alternatives, while RY and TD have only tiptoed into the mine fields.
Final point, I copy below a comment I made to another blog on that same issue… Let’s not all be lemmings”
“The reason Canadian Banks are a model of banking for the world, is that they have not adopted the herd mentality and followed blindly the path of most other banks. As such, monkey see, monkey do is not a sufficient rationale for cutting dividends.
I believe the market has punished them harshley in an unwarranted fashion, and will come to realize there is value backed by a strong balance sheet justifying a bounce in their stock prices in the near term. As you may recall, their recently announced results were substantially ahead of analyst concensus, and looks solid going forward. Their reserves have been built up, and can provide a good profit bounce when time comes to reverse such unused portions.
Let’s celebrate the difference and success, stop the pessimism, encourage solid market participants, rather than pile up the pressure with no justification.
I would be first in line to dump my holding should dividends get cut, as it would signal to me, that their financial problems run deeper than has been previously indicated.
Let’s not just blow away their unique position and long lived tradition every time the winds temporarily change direction. Think long term, think respect, think confidence.”
Mark my final comment to you is, please get creative and write more in debth analysis on topics of investor interest, rather than regurgitate some failed analyst comments. I am sure that the RY board knows not to make mistakes in following advice of Mr Hardy as they know better than anyone that he has been wrong more than right in the past.
Mr. McQueen, if you think that bank dividend cuts are such a good idea, may I suggest that you voluntarily donate your dividends to the banks whose shares you own. That move will certainly raise your bank’s Tier 1 Capital Ratios, and competitiveness and your shares should go up according to your theory.
Now I know that your answer would be, that a dividend cut would only work if everybody were to do it. But you could lead by example. “C’mon every body send back your dividends like I have.”
It doesn’t matter whether the Board of Directors cut the dividend or the shareholders do it.
So Mr. McQueen let’s see you start the ball rolling, and write out a cheque today to BMO, BNS and TD, supposedly the banks whose shares you own.
Let’s see you do it!
Avery
It would be an odd thing to lie about. BNS is owned outside of an RRSP and in issued certs, so in that case we are actually signed up for dividend reinvestment. Which means we are “giving” BNS back the cash in exchange for more paper. The other two are held at brokerage firms that don’t offer that capability.
You sound a bit grumpy. Were you burned by the income trust sector? I don’t mean to give away your dividends willy-nilly, but if the current dividend policies are a competitive disadvantage for the banks then OFSI needs to get ahead of this issue.
Thanks for stopping by.
MRM