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Cash-strapped companies take the ax to dividends

This year's 11 payout reductions so far will cost shareholders $12.6 billion annually.

February 03, 2009|Walter Hamilton

NEW YORK — If the stock market's plunge of the last five months feels like a punch in the gut, a big dividend cut is like a kick after you've hit the ground.

Unfortunately, many investors are getting accustomed to that feeling.

As Macy's Inc. demonstrated Monday, a growing number of marquee-name companies are not only reducing dividends, they're slicing them dramatically.

As part of an overhaul that will do away with 7,000 jobs, the department-store chain said it would cut its quarterly dividend to 5 cents a share from 13.25 cents.

And that 62% reduction is on the mild side of recent cutbacks. Of the 10 Standard & Poor's 500 index companies that took an ax to their dividends in January, the average reduction was 82%, according to data compiled by Howard Silverblatt, S&P senior index analyst.

Bank of America Corp. and regional banker Marshall & Ilsley Corp. both whacked their dividends 97% last month. Seven of the 10 dividend-cutters in January were financial companies, continuing a trend begun last year in the wake of the collapse in financial-sector earnings.

Companies generally are loath to reduce dividends, but now many are running low on options for conserving cash.

"When you cut a dividend, you don't do it for just a quarter," Silverblatt said. "It's one of the last items you cut. You're basically telling everyone you have a cash-flow problem and it's not short-term."

Dividend cuts intensified during the fourth quarter as the effects of the recession struck deeply in corporate America.

January and February, meanwhile, normally are chock full of dividend hikes as companies sprinkle good tidings in advance of annual meetings, Silverblatt said.

But this year, just 17 companies in the S&P 500 raised their payouts in January, down from 31 a year ago. The average increase: 9.5%.

Including Macy's, this year's 11 dividend reductions so far will cost shareholders $12.6 billion annually, while the 17 companies that have raised payouts will put a relatively meager $295 million more in shareholders' pockets.

Worse, Silverblatt says many more companies are likely to chop their payouts in the coming months, as corporate earnings continue to deteriorate.

"This will be the worst year for dividends in over 50 years," he said. "The devastation in dividends will be widespread and massive."


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