Firms Slash Dividends, Saving Cash

Wells Fargo on Friday slashed its dividend to shareholders, joining other distressed banks. But yields from nonfinancial companies are crumbling too as the recession deepens, giving investors another reason to get out.
U.S. companies have already slashed $40.7 billion in dividends in 2009, topping last year's $40.6 billion in just over two months.
No bank now ranks among the top 30 dividend-paying companies in terms of total dollars. Financial companies pay out only 11% of dividend income vs. more than 30% before the credit crisis hit, says S&P analyst Howard Silverblatt.

Dividends among S&P 500 companies are on track to fall 22.6% in 2009, the most since 1938, with many more cuts likely. The pain has spread from shareholders in banks to investors in auto, consumer discretionary and other stocks.
Dividend cuts are taking a big toll on market sentiment, even though retailer Wal-Mart hiked its payout Thursday by 15%, says Kevin Gardiner, head of global equity strategy at HSBC.
"It's a contributory factor to weakness," he said. "There's the ongoing uncertainty about the financial sector. But the newest development in my conversations with investors is undoubtedly the decline in dividends. It's another development that undermines the valuation case of stocks."
As stock markets nose-dived last year, some Wall Street analysts touted high-dividend-paying companies.
The S&P 500 dividend yield -- payout divided by price -- soared to a 17-year high of 3.14% at the end of 2008 as the major averages plunged.
Even safe bets now seem at risk. The overall S&P 500 dividend yield is actually a little higher today than on Dec. 31, but only because overall stock prices have plunged faster than payouts.
Energy companies that hiked dividends as oil prices rose are one group being watched.
"Several of the big oil majors have gone out of their way to say they plan to maintain dividends," Gardiner said. "But we know what's happened to oil prices. So investors are asking about oil (dividends)."

Banks Hoard Cash

Wells Fargo (NYSE:WFC - News) said it will slash its dividend by 85% to save $5 billion annually. JPMorgan (NYSE:JPM - News), PNC Financial (NYSE:PNC - News), US Bancorp , HSBC (NYSE:HBC - News), Bank of America (NYSE:BAC - News) and Citigroup (NYSE:C - News) have all cut dividends. General Electric (NYSE:GE - News), whose debt-laden financial service unit is struggling, slashed its dividend on Feb. 28.
Auto giant General Motors (NYSE:GM - News), teetering on bankruptcy, is another prominent dividend cutter.
"We've had the carnage in the bank stocks, carnage in the preferred (shares) in bank and auto stocks; there's been just an endless drumbeat of bad news on the dividend front," said Joseph Battipaglia, market strategist for Stifel Nicolaus, "all because the recession is deeper and lasting longer."
He says many companies are making the right move by holding on to capital amid the deteriorating economy. But falling dividends are another reason for investors to exit the market, he adds.
"Investors are very worried about the ability of the companies they own to pay their dividends," added Battipaglia. "It's adding more downward volatility to the marketplace, even though there will be exceptions like Wal-Mart."

He says dividend-focused investors are usually a stabilizing force on the market.

"In the absence of that shock absorber, stocks become less attractive," Battipaglia added. "Some investors have already moved to the sidelines because of worries over earnings in the S&P 500 and the economy. They could be joined by another group of investors that thought they had pretty safe, dividend-paying investments to work through the recession."
Dividend-focused investors face a double whammy: falling company payouts and higher taxes courtesy of the Obama administration, says Battipaglia. The president's budget plan would hike the top rate on dividends and capital gains from 15% now to 20%.
Not all dividends are falling. Including its 15% hike, Wal-Mart says it'll return $4.2 billion to its shareholders this fiscal year.
But many companies are increasing dividends by pennies to look good. Silverblatt says 50 companies have hiked dividends in 2009 by a total of $2.2 billion.
Not Just Financials

"Companies aren't seeing a light at the end of the tunnel," Silverblatt said. "They're preserving cash, they're being prudent about it, they don't know where they're going."
Nonbank dividend cutters include Pfizer (NYSE:PFE - News), Dow Chemical (NYSE:DOW - News), CBS Corp. (NYSE:CBS - News), Carnival (NYSE:CCL - News), International Paper (NYSE:IP - News), Macy's (NYSE:M - News), Penske Automotive (NYSE:PAG - News), Constellation Energy (NYSE:CEG - News) and Motorola (NYSE:MOT - News).
"Thus far, most of the dividend cuts we've seen have two common threads -- they've been financial institutions or cyclicals," said Josh Peters, editor of Morningstar newsletter DividendInvestor.
"We may be hitting a crescendo of dividend cuts that tail off from here. If we see a lot more dividend cutting from here, it's going to come from where it's not expected. But it all depends on the course of the recession. If we spike up to double-digit unemployment, we may see another wave of dividend cuts."

High Yield, High Risk
Peters adds that among high-yielding companies, some investors have questioned the outlook for Caterpillar (NYSE:CAT - News) and DuPont (NYSE:DD - News).
A JPMorgan report out March 4 identified stocks that "could potentially be prone to a dividend cut." The study focused on "purely quantitative" or technical data.
Among the firms said to be at risk: AT&T (NYSE:T - News), Textron (NYSE:TXT - News) and DuPont.

The report cited several utilities: DTE Energy , PPL Corp. (NYSE:PPL - News) and Progress Energy (NYSE:PGN - News).

It also named Spectra Energy (NYSE:SE - News); Qwest Communications (NYSE:Q - News) and CenturyTel (NYSE:CTL - News) as well as Harley-Davidson (NYSE:HOG - News), Paychex (NasdaqGS:PAYX - News), Microchip Technology (NasdaqGS:MCHP - News), Leggett & Platt and Eastman Chemical (NYSE:EMN - News).
Telecoms are better positioned than many companies to weather the economic downturn, UBS analyst John Hodulik says, though they're losing residential customers to wireless and cable rivals at a high rate.
"With a number of large companies such as GE and JPMorgan having slashed their dividends, AT&T and Verizon (NYSE:VZ - News) will increasingly be seen as safe havens within an increasingly ugly storm," he said in a report.
AT&T's dividend yield is 7.1%; Verizon's is 6.4%. Those are among the highest in the S&P. But AT&T's stock has dropped 21% in 2009. Verizon is down nearly 20%.
The S&P 500 is down 24.3% year to date. High-dividend-paying, nonfinancial companies have lost a similar amount, says Justin Walters, co-founder of Bespoke Investment.


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