Cutting the common stock dividend is a significant decision for any company’s board of directors.
When the board at a financial institution takes this rare step, as directors at Laurentian Bank of Canada did last Friday when they slashed the dividend, the goal should be to act boldly and conserve capital.
Instead, Laurentian’s leaders are being criticized for taking half measures. They announced a 40-per-cent dividend cut that analysts say didn’t go far enough. If they’re right, Laurentian will fall short of achieving the goal of its dramatic move, which the bank said in a press release was meant to “provide greater financial strength and flexibility to support continued growth.”
Laurentian had the dubious honour of being the first domestic bank to trim its payout to shareholders in response to the coronavirus pandemic, when it dropped the quarterly dividend to 40 cents from 67 cents. But in a crisis that’s seen energy companies cutting dividends far more steeply, or suspending payouts completely, analysts expected a more significant move from Laurentian. Sumit Malhotra at Scotia Capital Inc. said trimming the quarterly payout to just 25 cents would be “appropriate.”
“Over the next four quarters, we see Laurentian delivering operating earnings per share of $1.64 – very close to the new $1.60 annual dividend, which speaks to our view that a deeper reduction should have been enacted in order to provide ‘breathing room,’” Mr. Malhotra said in a report on Monday.
Over at RBC Dominion Securities Inc., analyst Darko Mihelic reached the same conclusion. He said: “With a high payout ratio and declining common equity tier 1 ratio, little room for growth and elevated economic risks because of COVID-19, it will be natural to question whether or not Laurentian’s dividend cut was deep enough.”
COVID-19 gives leaders of financial institutions a chance to clear the slate. Banks can write off all manner of past mistakes in this kitchen-sink of a quarter, and move forward with plans to upgrade the franchise. That’s why loan-loss provisions were higher than expected at almost every bank when they released results over the past two weeks – CEOs weren’t going to let a crisis go to waste.
Laurentian needed to clear the decks more than rivals. Chief executive François Desjardins launched a sweeping revamp of the bank’s branches and online services four years ago, part of a drive to bring profitability in line with peers. RBC’s Mr. Mihelic said on Monday that Laurentian is at “a critical juncture in its transformation.” While lowering the dividend by 40 per cent means an extra $46-million of capital annually to cover loan losses, a larger decrease would have given Mr. Desjardins more money to invest in the bank’s future growth, with little impact on the stock price today.
Cutting the dividend is never a decision to be taken lightly. Insurer Manulife Financial Corp. chopped its common share payout in half during the global financial crisis, and 11 years later, investors still highlight the move as a sign of weakness, compared with rivals that kept payouts stable.
Dribbling out bad news over time is also to be avoided. Oil producer Vermilion Energy Inc. looked indecisive, at best, when it slashed its dividend by 50 per cent in early March, then dropped it again 10 days later. In May, Vermilion’s chief executive departed, replaced by the Calgary-based company’s co-founder. If a board is going to cut the common share dividend, do it once and do it right.
Editor’s note: An earlier version of this article said the dividend yield on Laurentian Bank is 9.4 per cent. The figure represents the previous year's dividends. The more appropriate number is the forward annual dividend yield, which is 5.4 per cent.
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