Manulife Financial broke a covenant with investors by cutting its common stock dividend in half.
The prediction here is that this drastic move will set a precedent for the rest of Canada's financial services companies.
Manulife is far from alone in facing weak profits, as the downturn cuts into new business growth and the value of its portfolios. But newly named CEO Donald Guloien broke from the pack by slashing the payout to his company's owners by 50 per cent, a move that translates into $800-million of extra capital each year for the insurer.
Canada's major banks aren't earning their common share dividends either. This is to say the profits generated recently by the big six banks fail to support dividend payout rates set during better times.
However, bank executives took the view that dividends were critically important to a large portion of their shareholder base. The likes of Bill Downe at Bank of Montreal also pointed out that the dividend rate is meant to reflect profits over a full economic cycle, so the payout wouldn't be trimmed to reflect an unprecedented, but hopefully short-term, market meltdown.
Bank of Montreal and several other banks took other steps, such as aggressive dividend reinvestment progams, to offset the cost of common share dividends.
On the other hand, U.S. insurance companies and banks were quick to cut dividends last year, reflecting what their boards see as a new reality for financial services. There are plenty of directors on Canadian boards who say domestic financial institutions should take the same approach. To date, these hard liners have been in the minority.
Manulife's dividend cut marks a sea change. Mr. Guloien has clearly indicated that the insurer will prepare for the worst, and build a fortress-style capital structure that can withstand any storm. It's hard for any director, at any Canadian financial institution, to argue against caution and prudence.
There is a storm coming.
A great many Manulife shareholders are going to be shocked and appalled by Thursday's dividend cut. The extent to which they punish Manulife by dumping the stock and pounding down the share price will provide a case study in market dynamics.
If Manulife can cut its common share dividend and pay a minimal price for the move, in terms of its market valulation, then Mr. Guloien will almost certainly be a trailblazer among Canadian financial institutions.
If shareholders gather in front of Manulife's Toronto head office and burn the CEO's effigy, or at least knock back the stock price by a sizeable amount, then a different message will be sent. But that seems unlikely. Manulife, a company that commands considerable respect for its governance, has set a precedent.
Those depending on common stocks for income should realize that dividends were never sacred.