Impact of The Announcement of a Cut in Dividends Essay
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages
Impact of The Announcement of a Cut in Dividends Essay
Laurentian Bank: the impact of the announcement of a cut in dividends.
At the height of the 2008-09 financial crisis that revealed the fragility of global financial systems, particularly in the USA, a key topic
of conversation in Canada among investors and analysts was whether the chartered banks, faced with dire earnings forecasts would
cut their dividends. Regulators were concerned too and together their concern was one of loss of systemic confidence. As John Heinz reported in
the Global and Mail on December 5t 2008,
“A dividend cut at a time when investors’ nerves are already frayed would send a terrible signal, possibly rattling the faith of
depositors and touch off a crisis”
Investors today can thus point to history that apart from the National Bank, which cut its dividend in 1992, Canadian banks
have not cut their dividends, even when faced with past economic recessions eg. in the early 1980’s. Rather they have
rebuilt their balance sheets and focused on their core banking business as they did during the Great Recession that followed
the 2009-09 financial crisis.
Fast forward to 2020 by which time the Canadian financial sector had largely recovered from the near-death experience of that crisis,
but was now facing a global pandemic with lock downs and significant economic disruption. All the banks were reporting significant
declines in earnings and having to make substantial provisions for credit losses.
But it was Laurentian Bank (TSX: LB), Canada’s 7*h
whose profits had fallen by 79%, higher than the forecasts of many analysts’ forecasts, that announced a cut in its dividend by 40% which took it back
to the level it was in 2011. A move that was not followed by the other banks.
So, what went wrong at Laurentian that caused it to make such a significant decision when its competitors were facing the same pandemic
but chose not cut? The answer lies with its own issues. Prior to the dividend cut there had been persistent earnings erosion and a 35%
stock price decline that lead to a 8.6% dividend yield. By comparison, National Bank, also based in Montreal saw its stock price increase by 30%
over the same period. Even with the cut in May, Laurentian’s dividend yield, with a stock price of $31 was still over 5%, and at the time of writing this case,
with an increased stock price and a P/E ratio of 15.20, its yield was 3.97%. Above some of its rivals.
Laurentian, ahead of its 175’ h anniversary in 2022 had embarked on a $250m 7-year strategic plan with a push into digital banking through LBC Digital a direct to customer channel.
It closed up to half of its branches and converted the others to ‘financial clinics”. Its personal loan and residential mortgage growth stalled and Barry Schwartz of Baskin Wealth Management commented in June that
“Laurentian Bank needs to figure out what type of bank it is and what’s the
strategy going forward.”
The bank in justifying its dividend decision described it as a prudent move that would ‘provide greater financial strength and//ex/b/lily” at a time of a “highly uncertain economic environment.” Such a decision had a clear rationale as analysts reported that to maintain the dividend would have absorbed 98.6% of 1st quarter 2020 earnings.
Apart the immediate fall in stock price following the dividend cut, the bank announced on June 15th that the CEO, Francois Desjardins would be retiring at the end of month and that Stephane Therrien, an executive VP was appointed as acting CEO.
On October 30th Ms. Rania Llewellyn, whose career with Scotiabank spanned over 20 years was appointed CEO. The bank’s first quarter 2021 results showed a 4% increase in total revenue.
Discuss the case.
You could follow the literature here of establishing a dividend policy for a firm. While this case is set in the context of a bank where dividends have become sacrosanct for those investors seeking regular income — the widows and orphans’ argument as well as institutional investors such as pension funds, the same arguments would apply to other stocks who are known for their regular dividends. (have a look online at John Heinz’s model dividend growth portfolio).
Laurentian Bank (LB) argued that the cut was a prudent decision to conserve cash. However, the ‘market’ clearly did not see it that way.
Given LB’s earnings had been eroding for some time and stock price too so you need to ask the question why would the ‘market’ not expect a cut?
If you had more time to spend on this you could use an Event methodology to examine the pre- and post- market reaction (both volume and price data) to the cut. Likewise, you could use the same methodology for the announcement of the exit of the CEO in June and Rania Llewellyn’s appointment in October.
QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points: Student failed to submit the final paper. 20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. 40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. 50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). 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