Early Monday, one of the Globe and Mail's editors asked David Berman and me to look at the potential for cuts in bank dividends.
Blue-chip Bank of Montreal was yielding more than 11 per cent and the editor suggested we revisit fears that the common stock payout could get slashed. After all, any dividend yield above 4 per cent on a Canadian bank is considered generous by historic standards. Anything over 6 per cent is a warning. Double digit yields are a cry for help.
"They're not going to cut the dividend at BMO," I told Berman, with all the confidence that comes from having an RRSP that's overweight oil and gas. "There's no way any of these big banks chop the payout."
See, I know my Canadian banking history. Only one domestic player has cut its common stock dividend in recent memory - National Bank, after taking a pasting on corporate loans. The bank spent years in the penalty box as a result. No board wants to join this hall of shame.
Well, fast forward a few hours: The biggest of big banks did chop the dividend.
JP Morgan Chase, universally viewed with respect in a sector that's not exactly awash in that sentiment, cut its common share dividend by 87 per cent, to just a 5 cents a quarter The move takes $5-billion a year out of investors' pockets, and builds shareholder equity by the same amount.
"While we recognize our tremendous obligation to shareholders to maintain dividend levels, we also understand that extraordinary times require extraordinary measures," said Jamie Dimon, the top dog in American banking right now. He called this drastic cut a "strong precautionary measure," and mentioned, several times, that the economic outlook is getting worse, not better.
JP Morgan common shares featured a 5.9-per-cent yield Monday - the dividend was $1.52 annually - prior to the bank making its move.
Well, JP Morgan's Mr. Dimon just wrote a script that any Canadian bank CEO can follow. Domestic banks are in better shape that their American peers, and they haven't taken TARP funds from the government. But the storm is raging on both sides of the border. Loan losses are rising, fee income in falling, and the outlook is bleak.
If JP Morgan's board is willing to slash the dividend to preserve capital, the board at any Canadian bank is going to ponder the same strategy, long and hard. Canadian bank dividends are not safe.
For those looking for a quick tale of the tape, at the end of Monday's gut-wrenching session, Bank of Montreal sported a 11.4 per cent dividend yield. The next highest payout is at Royal Bank, with 9.2 per cent, then CIBC at 9 per cent, Bank of Nova Scotia at 8.1 per cent and Toronto-Domion Bank at 7.5 per cent.