Manulife head office in Toronto
Think of it as this recession's TransCanada PipeLines Ltd. moment.
Ten years ago, the steady-as-it-gets utility caused a collective gasp of disbelief as it slashed its dividend by 29 per cent to 80 cents to bolster its balance sheet and give it more flexibility with its cash. Investors, who had been repeatedly assured their payouts were safe, were forced to re-evaluate their thoughts on dividends and the companies they had trusted to keep paying them.
"TransCanada's cut was as big a shock as anything you could imagine at the time," said Gavin Graham, director of investments at BMO Asset Management. "Nobody saw it coming."
The dividend investor has been shaken hard since the markets crashed last October, with the likes of Yellow Pages Income Fund and Magna International - not to mention General Electric and Dow Chemical Co. in the United States - reducing their payouts as profits plummeted.
While the cuts have come fast and frequently, Canadian investors were deeply rattled Thursday after Manulife Financial's new chief executive officer, Donald Guloien, told them he would be chopping their dividends in half - to 13 cents from 26 cents a quarter - so the insurer would have "flexibility to respond to both risks and opportunities from a continued position of strength."
Manulife also said Thursday that it earned $1.8-billion in the second quarter, up from $1-billion a year ago.
While Mr. Guloien had hinted that payouts from financial companies weren't as sacred as some would like to believe, the size of the cut blindsided those who follow the company regularly.
"The surprise really comes from the size of the cut," said Mr. Graham, pointing out that the move will save the company $800-million a year. "While management made it plain that the dividend wasn't inviolate, you'd have to agree that 50 per cent is a pretty drastic reduction."
While the reaction to TransCanada's cut was slightly more severe - its shares fell 16 per cent in a day, Manulife's closed 14.5 per cent lower yesterday - they were both motivated by a desire to preserve capital and position themselves for better days.
In TransCanada's case, the full dividend was restored within five years as gas prices rebounded and the company restructured itself through asset sales. Today, it pays an annual dividend of $1.52v.
Long-term investors should cheer the decision for exactly that reason, said Danielle Park, president of Venable Park Investment Counsel Inc. in Barrie, Ont. Profits have been under attack, and companies need to make tough choices to build their balance sheets and position themselves for a recovery, Ms. Park said.
"Good for them," she said. "It's the responsible thing to do right now. Investors are of the mindset that they can have everything - capital appreciation, unlimited growth and dividend growth. Well you know what? Right now you can't."
She said companies such as Manulife promised investors too much and now have to reposition themselves. Dividend payments come out of profits, she said, and profits are down.
"It's a very volatile environment and profits have taken a hit," she said. "Longer term, this is exactly what you want a company to do. It is behaving like an adult - Manulife is saying, 'Do you want us to survive and thrive at the end of this or just pay you dividends and drive ourselves into the ground.'"
The move should not set off a wave off dividend cuts across the financial sector, analysts said. If those cuts were going to happen, they argue, they would have already - the financial sector on the S&P/TSX has rebounded 84 per cent from its March 9 lows.
"I know the broader fear is that if you have a blue chip cut the dividend, then you'll see others take similar action," said Peter Brieger, chairman and chief executive officer of GlobeInvest Capital Management. "One can never say never, but in the case of the banks we're not looking for cuts. And the other insurers don't seem to be in need of the capital in the same way as Manulife."
Tony Demarin, president of BCV Asset Management in Winnipeg, said the dividend cut irked investors, who wrongly believed that Manulife had seen the worst of the financial crunch. But as the recession eases, he expects more companies - including Canadian banks - to raise their dividends in the coming months.
DundeeWealth, a wealth management company, raised its payout by 75 per cent this week to 0.035 cents. BCE Inc. and Saputo Inc. have also raised their dividends this month.
"By 2010 I think you'll see dividend growth coming back simply because the worst of the recession will be over and we'll start to see positive economic growth," he said. "In most cases, the increase will be modest - but optically it looks good even if the real cash in your jeans isn't all that much."Manulife