Magazine article The Spectator

Dividends -- the Directors' Cut

Magazine article The Spectator

Dividends -- the Directors' Cut

Article excerpt

At least the savers whose interest rates have been squeezed still have their money in the bank. Shareholders, by contrast, are seeing their dividends slashed after also suffering substantial share price falls -- and there is no compensation scheme to cover their lost capital.

That is a risk of equity investment but there was a time when cutting the dividend was the last thing a company did; now it's top of the agenda as soon as business gets tough. When ICI reduced its payment to shareholders during the 1980 recession, its directors were pilloried and its share price plunged; now, freezing the dividend, cutting it -- or even totally abolishing it -- is part of the macho, hair-shirt management style of directors desperate to show that they are doing something. In comes a new board, out goes the shareholders' payment.

The number of companies cutting their dividends rose six-fold last year but with 2008 results now being announced, dividend falls and freezes are outnumbering increases. Last week Psion and Jardine Lloyd Thomson pegged their payments while property group Segro and insurer Aviva joined the ranks of the dividend cutters. ITV, Old Mutual, Manganese Bronze and Premier Foods told investors to expect nothing at all. Bovis joined fellow housebuilders this week in saying there will be no cheques in the post. Royal Bank of Scotland and Lloyds have followed Barclays in abolishing dividends -- even though the latter declared a £6 billion profit.

The City fears that so-called blue-chips from BT to Marks & Spencer will be next to tell shareholders to take the strain, and there are worries the life assurance firms will cut dividends to boost their balance sheets now that their investment portfolios have fallen.

Has it dawned on the life company directors that investments have fallen because companies are cutting dividends?

Some companies are seeking to conserve cash and others to preserve capital, but there is also a herd instinct in matters of dividend policy. Time was when companies would avoid a cut at all costs, if only to cover up financial weakness. Once one board cuts, however, others follow; and before long it's the norm. But it's no good reducing dividends to make the business more profitable (by using the cash to reduce debt, for example) if the owners of the company do not benefit from the enhanced earnings.

Inflation is falling but it is not yet negative; either directly or through pensions, many people rely on income from shares to live.

Even merely freezing that dividend income causes them pain. And while bank savers can reluctantly withdraw their deposits to supplement their cash flow, shareholders would have to sell equities at rock-bottom prices that produce very little capital. …

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