. It has done so . In fact, it has increased dividends in each of .
“Investors look at that record, and they count on it,” said Douglas J. Skinner, an accounting professor at the University of Chicago. “After a while, the dividend becomes sacrosanct.”
Cut dividends? . Investors would probably see a dividend cut as a sign of trouble — a clear indication that the company is short on cash. So it’s not surprising that despite a crimp in its cash flow in recent years, Coke hasn’t wavered on its dividend. Many other companies would love to say the same, but they can’t.
Companies hate to cut dividends because they know that such an announcement would hurt their reputation with investors. Yet in a difficult financial environment, startlingly large numbers of corporations are slashing dividends anyway. That trend is disturbing.
Look at the statistics: In 2015, 394 companies trimmed dividends, according to data provided by Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. That was a whopping 38 percent increase over the previous year, and it was 23 percent more than in 2008, an awful time for the stock market and for the economy.
The , when the world was staggering through a great financial crisis. A total of 527 companies trimmed dividends that year, Mr. Silverblatt’s data shows. Coca-Cola and other dividend-paying blue chips like IBM and McDonald’s were under severe stress in those days, too, but their financial resources were deep enough to allow them to keep the dividend stream fully flowing.
They were happy exceptions. A host of other major companies — like Alcoa, General Electric, Dow Chemical, Macy’s, Sotheby’s, JPMorgan Chase and Bank of America — decided, under considerable pressure, that it was time to capitulate. They all cut their dividends.
You may recall 2009 with a shudder. The market hit bottom that March, before beginning a long climb upward. That upward trajectory has now been interrupted. And the ebb and flow of dividends is an important part of the story.
The situation today isn’t nearly as dire for most companies as it was in 2009, and the stock market and the economy generally appear to be much stronger. Nor are all companies cutting dividends. In fact, over all, corporate dividends rose last year and, barring a severe economic shock, they are likely to do so in 2016. So are stock buybacks, the other widely used method of returning cash to investors. But as a market indicator, a wave of dividend cuts is an indication that many companies are troubled.
“This doesn’t mean that we’re in another 2009, or that the bottom is falling out,” said Paul Hickey, co-founder of the Bespoke Investment Group. “That’s not the case. But it’s hard to put a positive spin on it: So many companies cutting dividends is not a good thing.”
Pockets of pain have become more apparent, especially in the energy and commodities sectors. Battered by falling prices, for example, and Anadarko Petroleum announced this month that they were cutting most of their dividends. And on Thursday, Rio Tinto, the Anglo-American mining giant, said that the prospects for commodity prices remained dim — and it, too, slashed its dividend.
In times like these, companies with deeper pockets can use dividends to differentiate themselves from those with less wealth. with investors last month, for example, Laurence Fink, the chairman of BlackRock, the asset management firm, said with some pride that his company had maintained its dividend through tough years, including in 2008, and would keep doing so.
But he warned that others wouldn’t be able to do the same: “In the volatile years, especially if you look at some of the high-paying dividend stocks today, I think you’re going to see quite a few companies are going to have to lower their dividends.”
Quite a few are likely to cut their share buybacks, too. Depending on the size of their cash hoards, companies tend to turn buybacks on and off much more rapidly than they do dividends. For example, the value of buybacks exceeded that of dividends in the Standard & Poor’s 500-stock index before the financial crisis, but by the second quarter of 2009, that reversed. With the return of corporate prosperity, buybacks surged and by 2015, the value of buybacks was roughly 50 percent greater than that of dividends.
That is a puzzle for academics. As a fundamental economic proposition the two modes of payouts amount to the same thing, Professor Skinner said.
While there may be different practical consequences, both return economic value to shareholders. Yet the reality is that investors tend to drive up the shares of companies that raise dividends and punish companies that reduce them, while reacting much less to shifts in buybacks.
The explanation may come from signaling behavior. When a company can keep its dividends steady, it may be signaling that it is managed more deftly and more conservatively than its peers. At least that’s often the way it’s seen in the markets.
By the same token, investors may see buybacks as inherently transitory, so they don’t get as riled when they lose them. In any case, as a practical matter, buybacks are often a more flexible tool for corporate financial officers. Consider ’s moves early this month. They were drawn from the classic corporate finance playbook. It said that dividends were a “priority,” and unlike Conoco, it said that it would maintain them and preserve its ability to make important capital investments during the oil price downturn.
Once the biggest practitioner of buybacks in the stock market, Exxon has been paring them for the last two years, and announced that it would reduce them more radically to conserve cash. Exxon’s shares have actually risen slightly this month while Conoco’s have fallen sharply.
For investors, these corporate maneuvers are just another indication that the stock market is operating under duress. In the long run, it is the financial and earnings strength of companies that matters, not whether they are paying dividends or buying back shares. The problem, of course, is determining whether a specific company is merely being prudent by paring payouts, or whether it is revealing that its business is seriously troubled.
If you have long-term investments in broad index funds, and not in individual stocks, you don’t need to worry so much about particular companies, and even if dividend cuts portend market declines, you can prosper if you can endure some pain.
Even with recent declines, the S.&P. 500 index has returned more than 200 percent — 17.5 percent annualized — since the market bottom of March 2009. Indexes of stocks with high and stable dividends did even better. That may be because steady dividend payers are more solid. It may simply be that investors prefer dividends. We don’t really know.
But people who have truly relied on dividends for income may have to face a sad truth. Dividends aren’t bonds, and they may be cut at a company’s discretion. So love dividends if you must. Just don’t count on them.