Sticky dividends!

When we look at how companies have set dividends in most markets, the word that comes to mind is "sticky". Put another way, most companies set absolute dividends and stick with those dividends through good times and bad. A few even have a policy of consistently raising dividends and continue to do so, even in the worst of times. This has been true for decades in the United States, but I was curious about whether the last three months of market turmoil have made significant inroads into changing the policy. The answer seems to be yes, but with caveats...

1. S & P keeps track of how many companies in the S&P 500 index increase, decrease and suspend dividends, by month. In the last quarter of 2008, 32 firms increased dividends, 17 firms cut dividends and 10 suspended dividends. No firm initiated dividends during the period. If you are surprised that more firms increased dividends than cut or suspended dividends, here are the statistics for the previous three quarters.

• First quarter, 2008: 93 increases, 7 decreases, 4 suspensions
• Second quarter, 2008: 65 increases, 9 decreases, no suspensions
• Third quarter, 2008: 45 increases, 6 decreases, 8 suspensions
• Just as a further contrast, in all of 2007, there were 299 dividend increases, 7 decreases and 3 suspensions.

2. Some companies did deviate from long-standing dividend behavior in these last three months. To provide an illustration, Pfizer did not increase its dividends in 2008, for the first time in 42 years, evoking an article in the Wall Street journal wondering why they decided to do so...

I think 2009 will lead to even more conservative behavior, at least when it comes to dividend policy. After all, one reason that companies felt comfortable maintaining dividend payments, even in the face of declining earnings or losses, was the belief that they could raise funds from capital markets, if they needed them. If the last quarter of 2008 has taught them a lesson, it is that capital markets can shut down even for the largest companies in the most developed markets. There is a new found respect for large cash balances at companies, though I am not sure how long it will last.