Robert Sedran, an analyst from National Bank Financial, writes about the possibility of Canadian banks putting dividends on hold. Specifically Royal Bank (RY), TD Bank (TD), BMO (BMO), and CIBC (CM) may forego dividend increases this quarter as their profits decline, he writes. He goes on to say that Canadian banks typically raise dividends twice per year, but they may postpone increases because average profits before one-time items should be down about 1.4%. He will view any increases as a bullish sign.
It will be very interesting to see what comes to pass here. Canadian banks have been raising dividends at fabulous rates over the past 5 years. No doubt that the operating environment for these banks has softened. The capitial markets, wealth management, loans including subprime, and the general economy do seem soft currently when compared with the last few years. These banks in the past have all shown that they can continue to raise dividends and average out making more money on a year to year basis even in tough economic times. Fee-based revenue and retail banking probably really prop them up in poor times.
Royal Bank (RY) for example had a target pay out ratio (dividends paid divided by earnings per share) in 2007 of 40-50%; they ended up coming in at 43%. For 2008 their target remains at 40-50%. As you can see there is a little wiggle room in those numbers. Earnings can be flat, while dividends continue to grow, and this could continue as long as their outlook remains so that the pay out ratio comes back down into the desired range. Bank of Montreal (BMO) on the other hand may be getting close to the top of their targeted range, especially when you include recent one-time items; their targeted range is 45-55%.
This analyst's viewpoint and comments are indicating that he believes the '2 times per year' dividend raising habit may be lost for this year for these 4 banks. He does not seem to be doubting an annual raise all together for the banks.
In a separate article, analysts doubt Bank of Montreal (BMO) will raise dividend at all in 2008.