A Bay Street sign, the main street in the financial district is seen in Toronto, Jan. 28, 2013.Mark Blinch/Reuters
Canada's big banks are accumulating capital but are faced with fewer avenues for growth. One analyst says a special annual dividend could be the solution.
Robert Sedran of CIBC World Markets wrote in a note to clients on Wednesday the dividend would rise and fall with earnings unlike the bank's regular quarterly dividends, which are fixed amounts. This would leave the banks enough capital to grow assets organically, or the flexibility to weather financial troubles. The dividend could have a gross total payout ratio of 60 per cent to 90 per cent.
Mr. Sedran says banks are holding a lot of capital as a result of recent changes to requirements implemented by BASEL III rules and the Office of the Superintendent of Financial Institutions. And he expects these capital levels will rise even higher.
At the same time, opportunities to expand are scarcer as the banks expand into every available corner of retail and wholesale business, so there's also less need to keep the cash sitting around. A special dividend for yield-hungry investors could be the answer.
"After all, easy suspension of a special dividend is what differentiates it from a regular payout," Mr. Sedran said. "This is also a reason why payout targets are likely to lean on the conservative side when it comes to targeted payouts. In addition, this cautious stance could leave room for a modest buyback depending on the ratio chosen."
Mr. Sedran said that while he has been critical of special dividends for their unpredictability and inability to affect a company's valuation, this isn't the same idea. This special dividend would be reliable both in time and amount. It would be an annual top-up to a preexisting dividend payout, calculated to a certain proportion of net income.
And that's why it might be time to bring back the special dividend. It grew in popularity between the 1930s and the 1950s, but has since been largely replaced by share buybacks, according to research published in the Journal of Financial Economics, as Mr. Sedran sites.
But for banks that continue to blaze the takeover trail, as Toronto Dominion Bank, Bank or Nova Scotia have shown a tendency towards in the last several years, this dividend might not be the best solution – especially if the bank wants to pay cash, which will be tighter with the special dividend strategy in place. Bank of Montreal did one one big acquisition in the U.S. that limited its dividend growth for a while. Whether or not regulators would give the strategy a nod is another question.
(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)
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