Companies behaving badly can ruin all sorts of things: the economy, the environment, and your dividends. For instance, consider some examples from the recent past:
- If you've instigated a global economic crisis and required a massive government bailout, chances are you've had to cut your dividend.
- If you've dumped more oil into the ocean than any other company in the history of mankind, chances are you've had to cut your dividend.
- If your industry was crushed by the recession, poor business models, and stronger competition, and you both took government assistance and declared bankruptcy, chances are you've had to cut your dividend.
Yet sometimes, after the damage is done and the dust has cleared, companies restore their dividends. We can look at the recently troubled industries of banking, oil, and auto manufacturing to get a better sense of when dividends go bad and what it takes to bring them back.
Don't bank on it
Citigroup (NYSE: C), one of the prime players in the financial crisis, halted its dividend in 2009, but it recently announced that it will start paying one again. Before the meltdown in 2007, Citi's dividend was as high as $0.54 a quarter -- before adjusting for its 1-for-10 reverse split. The bank will pay its first dividend in more than two years on June 17 at $0.01 a share. Consider this progress. That'll be at the same rate as Bank of America (NYSE: BAC), which, granted, isn't the most flattering comparison in the world.
The Federal Reserve flat-out rejected BoA's bid to increase its dividend beyond a symbolic penny a share. BoA insists that it will keep working with the Fed to find a path to a dividend increase, but with analysts having labeled the bank "behind" its peers in the industry, we may not see that increase for some time.
Oil and water
In March, BP (NYSE: BP) paid its first dividend since before last year's Gulf oil spill, but the payout is half of what it was last year. The company and its shares took a huge hit after the disaster, in part because of the magnitude of the spill and in part because 24/7 media coverage didn't let anyone forget how terrible the situation really was.
It's hard to get a sense of when BP's dividend will bounce back to full strength based on industry precedent. Consider the case of the Exxon Valdez. When the tanker leaked oil all over Prince William Sound in 1989, Main Street shuddered, but Wall Street barely flinched. Shares of Exxon, now Exxon Mobil (NYSE: XOM), suffered only a 3.9% drop and recouped all losses four weeks later -- all the while never reducing its dividend. BP has a strong balance sheet and has stated its commitment to returning to a "progressive dividend policy." This dividend may bounce back sooner rather than later.
It's auto-matic
General Motors (NYSE: GM) has the dubious distinction of needing both government money and bankruptcy protection to survive. It cut its $0.25 quarterly dividend in the summer of 2008 before going bankrupt one year later. Unlike its counterpart Ford (NYSE: F), the company hasn't announced any plans to reinstate its dividend anytime soon.
Ford, which received no bailout and is thus not subject to oppressive government oversight, has expressed a desire to reinstate its dividend. Still, the company maintains that its first priority is paying down debt to get its bond rating back up to investment-grade status. Though it means waiting longer for a dividend, this is good news for investors. An investment-grade credit rating would mean that Ford could save huge amounts of money through lower rates when borrowing funds in the future.
When it's all said and done
Companies will continue to behave badly, and our dividends are never guaranteed. It's important to consider what ruined the dividend in the first place. Often, if an entire industry is affected, there will be one or two companies that make for better dividend investments than their peers. Keep an eye on the competition, and don't be afraid to consult the history books.
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