My colleague Boyd Erman and I have a wager outstanding right now: I bet a large coffee that at least one bank will cut its common share dividend before this credit cycle is done.
Boyd's got a large Tim Hortons, black, no sugar, riding on the banks holding firm on dividends. (Boyd actually thinks one bank will shock markets by raising its dividend later this year, but we couldn't work that variable into our bet.)
My wager is based on a common-sense view: A company that isn't earning its dividend shouldn't be running down retained earnings by handing out cash. I find it unconscionable that Canadian banks can dilute shareholders by raising equity, then turn around and flush that capital away in dividends. (Last time I used the word 'unconscionable" to describe bank dividends, a senior who depends on this cash wrote to explain I was a 'punk,' and that if I wanted to experience something unconscionable, I should try living off the income from a diminished portfolio during this nasty market.)
Boyd lives in the real world.
He sees bank boards taking a long view of profitability and the credit cycle, and maintaining dividends because these payouts are sustainable over the long term. He thinks boards take their obligations to shareholders seriously, and know how important dividend income has become to many individuals. He also thinks that cutting dividends at a time like this would send all the wrong signals about the strength of Canadian banks.
With our little wager in mind, let's take a look at National Bank Financial analyst Robert Sedran's preview of how each bank's earnings this quarter will match up with its dividend policy. His take: Only one of the big six bank is expected to earn their dividend. That would seem to tip the odds in favour of a dividend cut.
Despite these continued shortfalls, I've set aside money for Boyd's coffee, 'cause I think I'm going to lose this bet. Given the upswing in the economic outlook, it would be shocking to see any of the banks trim their dividend this quarter. Canada's big banks are the ocean liners of finance: They are riding out the storm.
Here is Mr. Sedran's take on dividends and profits in the coming quarter, with the banks scheduled to start releasing their numbers next week:
Bank of Montreal: Based on our f2009 estimate, the current quarterly dividend implies a 71 per cent payout ratio in that year, which is well above the BMO's 45 per cent to 55 per cent target range.
Bank of Nova Scotia: Based on our f2009 estimate, the current quarterly dividend implies a 59 per cent payout ratio for the year, well above Scotiabank's 35 per cent to 45 per cent target range.
Canadian Western Bank : The current quarterly dividend of $0.11 per share implies a 33 per cent payout ratio in f2009 based on our estimates.
CIBC: Based on our f2009 estimate, the current quarterly dividend at CIBC implies a 60 per cent payout ratio for the year.
Laurentian Bank: Based on our f2009 estimate, the current dividend implies a 39 per cent payout ratio for the year, which is below Laurentian's 40 per cent to 50 per cent target range
National Bank: Based on our f2009 estimate, the current quarterly dividend implies a 47 per cent payout ratio for the year, which is within the National's 40 per cent to 50 per cent target range.
Royal Bank of Canda: Based on our f2009 estimate, the current quarterly dividend implies a 51 per cent payout ratio for the full year, which is above Royal Bank's 40 per cent to 50 per cent target range.
Toronto-Dominion Bank: Based on our f2009 estimate, the current quarterly dividend implies a 51 per cent payout ratio for the year, which is above the TD's 35 per cent to 45 per cent target range.Report Typo/Error
- Bank of Montreal$91.53-0.24(-0.26%)
- Bank of Nova Scotia$77.09-0.31(-0.40%)
- Canadian Western Bank$28.00+0.01(+0.04%)
- Canadian Imperial Bank of Commerce$106.94+0.27(+0.25%)
- Laurentian Bank of Canada$53.12+0.04(+0.08%)
- National Bank of Canada$55.29-0.29(-0.52%)
- Royal Bank of Canada$92.25-0.25(-0.27%)
- Toronto-Dominion Bank$63.730.00(0.00%)
- Updated August 18 4:00 PM EDT. Delayed by at least 15 minutes.