TD’s dividend strategy has investors nervous

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On his way out the door, Ed Clark is getting a final reminder about the first rule of banking: don't fiddle with your dividend.

On Toronto-Dominion Bank's last quarterly conference call, Mr. Clark surprised analysts by announcing the bank would alter its dividend policy. Although the bank has been hiking its payout twice a year of late, any future hikes can be expected just once annually.

There was good reason for this. A few years ago TD shifted its target dividend payout ratio to between 40 and 50 per cent of annual earnings, up from between 35 and 45 per cent. To get there, the bank had to beef up its quarterly dividend quite quickly, so it became the norm that TD would boost its payout twice a year.

Now that the bank has reached the target range, Mr. Clark said in March that he wants to cool down. Yet no matter how rational his argument was, and despite assurances that the bank still planned on boosting its dividend in line with earnings increases, investors are still flummoxed, worried that this means something bad for their treasured payout.

Mr. Clark had to address the issue once again at the bank's annual general meeting on Thursday, after a shareholder stood up to ask precisely about this issue. The question came after bank analysts ‎were surprised by the decision on the last quarterly earnings call, and asked Mr. Clark for clarity on the reasoning for the change.

Much like on the quarterly conference call, Mr. Clark stressed that dividends will continue to increase in line with earnings, and added that "no one should read anything" into the change around the frequency of increases.

But this time he ad-libbed a bit more, to offer some extra justification for the decision. The problem is, the new info isn't going to help quell any investor confusion.

"As we look forward, there's a lot of uncertainty in the world," Mr. Clark told the crowd in Calgary, adding that continuing with the twice-a-year increases would be a "harder thing to do, frankly."

Suddenly there's a crack in the door, allowing investors to wonder if this means TD will struggle to raise its dividend at all – something Mr. Clark clearly didn't mean.

So let that serve as a reminder about the second rule of banking: if you tinker with your dividend, be sure to be as confident as possible. Bank shareholders can be a fragile bunch.