Companies Slash Dividends at Fastest Rate in 53 Years

By Courtney Dentch and Jeff Kearns

Jan. 23 (Bloomberg) -- U.S. companies are reducing dividends at the fastest rate in half a century, squeezing investors who depend on the payouts more than ever to boost returns.

Five companies in the Standard & Poor’s 500 Index slashed $7.5 billion in outlays this month, more than all the cuts from 2003 to 2007, S&P said. Today, General Electric Co. backed the dividend it has paid since 1899 despite concern that four quarters of declining profits will sap available cash.

The worst financial crisis since the Great Depression is forcing companies to hoard cash after earnings before one-time costs dropped 38 percent last year, the most since 2001, according to data compiled by Bloomberg. Stock losses pushed dividends as a percentage of the S&P 500’s price above 4 percent in 2008, the highest since Bloomberg data began in 1993.

“A lot of people rely on those dividends for income,” said Tim Ghriskey, who helps oversee $2 billion as chief investment officer for Solaris Asset Management LLC in Bedford Hills, New York. “If the economy continues to deteriorate, we’re going to see more cuts, and it’s going to hurt them even more.”

An investor owning the S&P 500 who pocketed the average dividend paid by its companies in 2008 would have lost 36 percent last year, compared with a 38.5 percent decline for the index itself. That’s the biggest difference in at least 16 years, according to data compiled by Bloomberg.

The number of S&P 500 companies reducing shareholder payments climbed for five straight months to 53 in November, the last period for which data is available, S&P said. That’s the most since records began in 1956.

Lagging Indicator

Investors may have to wait before payouts rebound. Dividends are a lagging indicator of financial health and can take a year to recover once the economy stops shrinking, said Dirk van Dijk, research director at Zacks Investment Research in Chicago.

“If you’re a trucking company, your first priority isn’t to raise the dividend,” van Dijk said. “It’s to replace the truck that’s leaking oil.”

Companies in the S&P 500 cut $40.6 billion in payouts last year after a five-quarter profit slump lowered cash reserves, according to S&P data. More than 90 percent of the reductions were by financial companies. The percentage of profits returned to shareholders rose to a seven-year high of 63 percent at the end of 2008, leaving 23 companies paying more than they earned in the last year, according to data compiled by Bloomberg.

AAA Rating

Jeffrey Immelt, GE’s chief executive officer, today reiterated the company’s commitment to paying its $1.24 a share dividend this year. The Fairfield, Connecticut-based company also said fourth-quarter profit from continuing operations fell 43 percent, the fourth straight decline.

UBS AG analysts said Jan. 20 that GE may cut its dividend and divert the money to its industrial businesses. Keeping the dividend “may impair its ability to invest in its core industrial businesses as the same pace as its competitors,” the UBS analysts wrote then.

Pfizer Inc., the world’s largest drugmaker, froze its payout last month after 41 years of increases. The company said Dec. 15 it would keep its quarterly dividend at 32 cents a share because of the pending loss of patent protection for Lipitor, which accounts for a quarter of its revenue.

The New York-based drugmaker paid $8.6 billion in dividends last year and ended the third quarter with about $26 billion in cash and short-term investments, according to spokeswoman Joan Campion. She didn’t return a call seeking comment on the dividend’s freeze.

Declining Profits

Earnings among S&P 500 companies are expected to fall 28 percent in the fourth quarter, with declines across each of the 10 industry segments, according to analyst estimates compiled by Bloomberg. For 2008, S&P 500 companies probably earned a combined $44.91 a share before one-time items, a profit measure that gauges the ability to pay a dividend, according to data and estimates compiled by Bloomberg. That’s down from $73.01 in 2007.

Charlotte, North Carolina-based Bank of America Corp., the largest U.S. lender by assets, lowered its dividend to 1 cent from 32 cents this month after posting its first quarterly loss since 1991. New York-based CIT Group Inc., the commercial lender that converted to a bank holding company; Atlanta-based SunTrust Banks Inc.; and Marshall & Ilsley Corp., Wisconsin’s largest bank, also reduced their payouts in January.

“There’s acute pressure on dividends and the longer the economy remains in recession the more acute it becomes,” said John Skjervem, who helps manage $130 billion as chief investment officer at Northern Trust Personal Financial Services in Chicago. “It’s going to get worse until collective confidence in the business cycle is restored.”

To contact the reporters on this story: Courtney Dentch in New York at cdentch1@bloomberg.net; Jeff Kearns in New York at Jkearns3@bloomberg.net.