Investors push banks for dividend raises

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Pressure is building on Canada's biggest banks to raise their dividends as investors grow impatient to see their payouts boosted after three years without increases.

Toronto-Dominion Bank added fuel to the debate Thursday when Canada's second-largest bank hiked its payout by 8.2 per cent, making it the first of the Big Five banks to boost its dividend in years. The increase, to 66 cents a share, was significantly higher than analysts were expecting and helped push TD's shares up more than 4 per cent on the heels of a record quarter.

Soon after, shareholders at Royal Bank of Canada annual meeting questioned chief executive officer Gordon Nixon about when the country's largest bank would follow suit, given that RBC turned in a record first-quarter profit.

Though RBC wasn't expected to raise its dividend this quarter, several investors suggested to Mr. Nixon that they are losing patience. Mr. Nixon said RBC is still within its payout target of 40 per cent to 50 per cent of earnings. With a first-quarter profit of $1.84-billion, the bank now sits at just over 40 per cent.

"We're now at the low end of that range and we'll continue to monitor our performance and results throughout the balance of the year," Mr. Nixon told shareholders, adding that it will be the board's decision. After the meeting, RBC chairman David O'Brien said that if the bank's first-quarter performance is maintained, the board would recommend a payout hike.

"I said to Gord that if he could produce in the next two quarters the results of the first quarter, we'd certainly have to look at it pretty seriously," Mr. O'Brien said.

The heightened focus on dividend increases comes after the banks avoided boosting their payouts on the advice of the federal banking regulator. Banks were advised to preserve capital until new global banking rules were set. That advisory was lifted last fall, prompting speculation on when the dividend increases would begin flowing again.

For RBC, the makeup of the company's record profit in the first quarter is the crux of the matter. The bank had $1-billion of revenue from its trading operations, which drove the earnings. That revenue is generally less reliable than lending and deposits in retail banking, which were a key part of TD's first quarter.

So although shareholders are getting restless to see dividend increases, analysts are treading more cautiously. "We think the decision to hold off on a dividend increase [at RBC]… speaks to apprehension on the part of the board in looking at the capital markets contribution this quarter as sustainable," said Sumit Malhotra, financial services analyst at Macquarie Capital Markets.

Bank of Nova Scotia may be the next to face questions about boosting its payout. Scotiabank was considered a dark horse to raise its dividend heading into this earnings season, with a payout ratio of about 43.9 per cent and a stated target range of 40 per cent to 50 per cent.

Bank of Montreal, which has a payout ratio of 53.5 per cent, sits at the upper end of its 45- to 55-per-cent target range and is not expected to entertain an increase until 2012. CIBC, which has a ratio of 46.4 per cent, is in the middle of its target range of 40 per cent to 50 per cent, and may not entertain a hike until later this year at the earliest.

National Bank of Canada, the sixth biggest bank, increased its dividend in December, while smaller Laurentian Bank also recently increased its payout. The return of dividend increases to the Canadian banking sector shows that executives and directors, as well as regulators, are no longer on high alert about bank capital levels.