The report "Do Big Companies Cut Dividends to Grow?" conducted by Pedro Catarino, Marc Goedhart, Tim Koller, and Rosen Kotsev from McKinsey & Company explores the behavior of large, stable corporations concerning dividend cuts. Contrary to the common notion that companies might cut dividends to allocate resources towards growth initiatives, the study indicates that such actions are almost never taken by well-performing corporations, especially during stable economic conditions.
The researchers analyzed data from 1995 to 2021, focusing on publicly listed companies in the United States. They defined a significant dividend cut as a decrease of at least 10% in the dividend per share (DPS). The findings showed that among 1,225 companies with a consistent dividend policy, 71% maintained or increased their DPS without making a significant cut. Only 29% of companies announced a significant dividend cut due to economic crises or a decline in profits of at least 20%, or both. Notably, virtually no company made a significant dividend cut out of choice rather than necessity, and even less so to fund a future growth initiative.
The report further elucidates that annual dividend cuts by large public companies are quite rare, with fewer than 2% of the companies in the study reducing dividends in a typical year. The situation became slightly more common during major economic crises like the 2008-2009 credit crisis and the COVID-19 pandemic, where over 5% and more than 15% of companies, respectively, reduced dividends.
The authors caution CFOs to consider the potential impact of dividend cuts on investor perceptions, which might negatively affect the stock price and the company's ability to attract talent or secure acquisitions. It's essential for CFOs to prepare for potential investor backlash and communicate the rationale for any dividend cut transparently.
Ultimately, while reducing dividends can sometimes be necessary, the report suggests that it's not a common strategy for companies seeking growth. CFOs should approach changes to dividend policies thoughtfully, understanding that such moves are relatively uncommon in the context of strong earnings and economic conditions.
