When to Board the Dividend Bandwagon
from
November/December 2003
by Suzanne McGee
Directors of Dial Corp. gathered in Park City, Utah, in August for their annual strategic planning session. The big item on the agenda: management’s proposal to boost the dividend by 125%.
The finance committee had discussed the issue the previous evening and liked the idea. The board agreed, raising Dial’s quarterly dividend from 4 cents to 9 cents a share. Among those who welcomed the decision was CFO Conrad A. Conrad. “It’s a recognition of our turnaround,” he says.
Like the “rocker chick” look of the 1980s, dividends are back in style. In addition to Dial, companies such as Citigroup and Procter & Gamble have increased them. Others, including Reebok International, have resumed paying dividends for the first time in years. Microsoft and Jones Apparel Group are among those issuing their first dividends ever.
One big driver for all this, obviously, is the new tax law, which cuts the maximum rate that investors must pay on dividend income by a half, to 15%. Dividends are also a way for companies to mollify shareholders who have been battered by tumbling stock prices, in part brought on by the rash of poorly conceived and ill-fated mergers and acquisitions during the 1990s, when dividends were seen as a mundane way to spend money. “What got people on the cover of Business Week wasn’t paying excess cash back to shareholders, but taking big, sexy risks with that cash by making a big acquisition or doing some other flashy deal,” says Ted White, director of corporate governance at Calpers, the California public employees’ pension fund.
But board members need to be careful about hopping onto the dividend bandwagon. “There’s a risk that directors will fall into the trap of just approving dividend proposals brought to them by managers,” says Nicholas Hudson, senior vice president of the corporate-finance consulting firm Stern Stewart & Co., whose clients include Mandalay Resort Group, a hotel-casinos operator that just paid its first dividend. Others agree, and suggest that directors push management hard to see how thoroughly it has examined other ways to spend the cash—on an acquisition, say.
Waste Management CEO Maury Myers persuaded his board to choose a dividend rather than an acquisition by arguing that the available acquisitions wouldn’t pay off. “It’s so difficult to find one that offers a competitive return on investment and that won’t dilute earnings,” he later told Corporate Board Member . The board backed his recommended boost of the annual dividend from a penny a share to 75 cents.
Although Microsoft’s board approved a dividend, Mark Bertelsen, a senior partner at Wilson Sonsini Goodrich & Rosati in Palo Alto, California, says smaller tech firms may want to keep cash on the books to reassure potential customers that they’ll be around to support their products.
Boards also need to consider whether their companies can maintain the same level of dividend payments in the future, come what may. “Cutting a dividend is like belching in church—it’s considered in very poor taste,” says Michael Mankins, managing partner of Marakon Associates, a consulting firm.
Directors who haven’t encountered dividend proposals before should consider hiring independent advisers, says Robert Mattson, a partner at the California law firm of Morrison & Foerster: “If it’s new territory, then it’s a good way to ensure that the directors are making an informed decision, not just rubber-stamping a management proposal.”
