Tuesday, April 1, 2008

* Dividends Under Attack, Again...

Back in the old west, if you had a reputation as a quick draw, there was always someone willing to risk their life to see if they were better. If you are good, someone will always be coming after you. Dividends must be really good.

As noted in a recent Chicago Tribune article "Lenders take cue to revisit dividends", the latest assault on dividends comes from Treasury Secretary Henry Paulson. In a speech this month, he said financial institutions beset by bad loans and failed business strategies should be "revisiting dividend policies."

The article turns the tables on Mr. Paulson with this quote:
You could make a case that stressed-out lenders should be increasing, not decreasing, their dividends these days. Having failed to perform as expected, the managers of banks guilty of lax and abusive lending policies should give cash back to their investors. Investors, in turn, could redeploy the money to better, not to say more ethical, enterprises.
If these companies start cutting their dividends, they will alienate a large contingent of their investor base at a time when they are trying to restore shareholder confidence and raise capital. The last line of the article sums it up well:

Plunging into bank stocks in the current environment seems like risky business, but confidence in the company's dividend is crucial to taking the chance.
Sometimes cutting its dividend is the right thing for a company to do. However, five years from now those companies will still be paying for it.

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