Once-reliable dividends are drying up at a record pace

Investors are paying for firms trying to stash away cash, though Minnesota firms are faring better.

Along with employees, vendors and subcontractors, investors also took a huge pay cut from corporate America this year.

As public companies seek to preserve cash amid the worst economic recession in decades, they slashed about $77 billion in dividend payments to shareholders in the first quarter, according to Standard & Poor's.

From giants like General Electric to snowmobile maker Arctic Cat, CEOs and their boards have agonized over cutting dividends or eliminating them altogether. Many long-term investors such as retirees and foundations rely on dividend income, so cuts or suspensions can have a significant impact on lifestyles and program budgets.

"The decision to reduce our quarterly dividend was thoughtfully considered and very difficult, given the importance of the dividend to our shareholders," U.S. Bancorp CEO Richard Davis acknowledged in March. "It was, however, the right decision, as our industry continues to confront uncertainty in the financial markets and a weakening economy." USB, a healthy bank by today's standards, slashed its quarterly investor payout by nearly 90 percent to 5 cents per share.

In February, General Electric Co. -- the classic widows-and-orphans stock -- cut its dividend for the first time since 1938, a move that will save the company about $9 billion a year.

The January to March period marked the first quarter since Standard & Poor's started recording dividend data in 1955 that the number of dividend cuts was greater than the number of dividend increases. A record low 283 companies announced dividend increases in the first quarter of 2009.

"While the number of dividend decreases is at a record high, the number of increases has set a new record low,'' said S&P senior index analyst Howard Silverblatt in April. "Since 1955, the average has been 15 increases for every decrease. Now its three increases for every four decreases."

Minnesota firms are faring somewhat better. So far this year 10 Minnesota-based companies have increased their dividends among 44 that paid them at the beginning of the year, while five companies have cut them.

In addition to U.S. Bancorp, TCF Financial cut its quarterly dividend from 25 cents to 5 cents per share. To an extent, Davis and TCF CEO Bill Cooper have blamed strings attached to the federal government's eight-month old bank-relief investment program and a complacent Federal Reserve for the financial service industry's distressed condition. Regardless, both banks also have had to take large write-downs on their own loan portfolios.

Within the last year digital memory maker Imation, payments firm MoneyGram and HMN Financial discontinued dividend programs as their business went south.

"Not everybody is cutting dividends," noted Phil Dow, chief market strategist at Minneapolis-based RBC Financial Wealth Management. "The cuts have been pretty much centered in the financial sector and health care. There's still more companies that have an enlightened dividend policy."

Dow has long advocated that investors buy quality companies which pay dividends that rise over the long term.

A recent report by Prof. Kenneth French at the Amos Tuck business school at Dartmouth University found that dividend-bearing stocks in the S&P 500 outperformed those that did not pay dividends between 1926 and 2008.

"It takes patience, but people can expect better-than-average returns from dividend-paying stocks if historical trends hold true," Dow said.

Target, Medtronic, Chevron-Texaco, Wal-Mart, IBM and AT&T are all examples of pretty good performers over the years that have not slashed their dividends.

Dow owns Vanguard Dividend Appreciation, a low-cost exchange-traded fund, in his personal portfolio. The dividend yields about 3 percent to investors at current prices and the portfolio is a diversified mix of blue-chip stocks. The fund is down about 30 percent over the last year.

This month, Communications Systems and Xcel Energy declared dividend increases. Communications Systems declared a cash dividend of 14 cents per share, up from 12 cents per share. Xcel raised its dividend from 23.75 cents per share to 24.50 cents per common share, and declared regular quarterly dividends on its preferred shares as well. On Thursday, Supervalu continued its history of paying dividends for the last 70 years by announcing an increase in its quarterly dividend to 17.5 cents per share from 17.25.

If companies aren't cutting dividends, they are looking to preserve cash in other ways. 3M Co., which has paid 370 consecutive quarterly dividends, raised its dividend for the 51st year in a row. But this latest increase was less than some previous increases, and the company decided to suspend its share repurchase program to preserve cash.

Awaiting return to normal

Dividend cuts aren't taken lightly by companies or investors. Dividend payments are part of a company's culture and many highlight the consecutive dividend payments and dividend increases to their shareholders. But as they see more and more companies cutting dividends, it's becoming easier psychologically to take that action.

"You can cut dividends now and the stock will go up because you are seen as taking care of things," said S&P's Silverblatt.

Most companies that have made cuts recently have pledged to increase their dividends when the economy and their fortunes improve. Look for both TCF and U.S. Bancorp to begin increasing their dividend levels. "It is also important for our shareholders to know that we are committed to returning the dividend to a normalized rate as soon as possible," Davis said.

Arctic Cat, which has paid a quarterly dividend since 1995, suspended dividends in January, which will save about $5 million annually. Said CEO Christopher Twomey in the company's third-quarter earnings release: "While we cannot predict when the economy will improve, we expect that as conditions normalize, our future earnings levels would permit resumption of dividend payments."

Banks hit hardest

Silverblatt thinks we've seen the bulk of the damage to dividend dollars. But the next test will come in the fourth quarter as companies begin to budget for next year. "If they don't feel comfortable that they will have a stronger 2010, we might be in for another round of cuts," he said.

Financial companies have been responsible for the majority of cuts: According to S&P, two-thirds of the dividend cuts in the third quarter and 93 percent of the dollar damage was from financial issues.

Ben Crabtree, a principal with Stifel, Nicolaus & Co. Inc., follows small- and mid-cap commercial banks in the Midwest, including TCF Financial. He points out that while dividend cuts can be a hardship for investors, the cuts serve the desire of regulators to save banks and allow them to keep lending.

"It's a triumph of safety and soundness over financial returns," said Crabtree.

Once banks pay back any bailout funds, they'll start increasing dividends again. That will depend on overall economic recovery. But don't expect banks to return dividends to historic levels, he said, because regulators will require higher capital ratios in the future even after full earnings recovery.

"Three to five years from now, dividends will be lower than [they were] two to three years ago," Crabtree predicts.

Patrick Kennedy • pkennedy@startribune.com • Neal St. Anthony • nstanthony@startribune.com

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