A Rational Dividend Policy for Savings and Loan Companies

Abstract

THERE HAS BEEN a recent surge of interest in the dividend policies of savings and loan holding companies. New tax regulations, effective in January, 1963, have encouraged the prospect for cash dividend declarations this year. Financial publications have commented with optimism on the promise of several companies to initiate cash payments. It is likely that many publicly held companies will change their past dividend policies during 1963. In the midst of this rumored change there has been little reasoned discussion of the past, or possible future, dividend policies of these companies. Most comments have been restricted to the possibility that cash payments may now be made by some companies, under specified conditions, as a result of the 1962 legislation. This may satisfy many Financial Analysts, but others may properly ask how dividends-either cash or stock should be determined in this industry. The past dividend policies of the holding companies have been largely ignored. This is understandable, for a study indicates that most companies have had no rational dividend policy in recent years, even if there has been a semblance of uniformity of stock dividend payments. Stockholders are hard pressed to understand the basis of past dividend payments, their relation to earnings or market price. If this confusion and random action continues, investors in these shares will remain uncertain and insecure. Though investors' enthusiasm may be buoyed temporarily by small, sporadic, cash payments, no confidence in dividends will develop unless they are related to a clearly stated, understandable policy. Initial cash dividends, as a new industry policy, may carry both benefits and dangers for stockholders and management. During the past year, the shares of most savings and loan holding companies fell sharply from high price/earnings multiples, despite improved earnings for most companies. The recent price recovery of some stocks has probably been influenced more by continued excellent operating results (despite gloomy predictions), than by dividend anticipations. Most Analysts realize that cash dividends initially will be small. Small cash payments may help the investment climate of these shares, particularly for the many stockholders requiring some cash return. Despite rapid earnings growth, stockholders in this industry have received virtually no cash returns and have remained dependent on the price appreciation of shares. With last year's decline in market prices, investors may rightly ask when and how such earnings will be translated into meaningful dividends. The dangers of such payments, no matter how small, are multiple. If a company's earnings increase, and initial cash payments are not maintained or increased, investors will be disenchanted. If a company's earnings decline, and the dividend rate is reduced or discontinued, confidence will fall. If future cash or stock dividend policies remain unrelated to earnings, investors will not understand the basis for dividends, even if rates are maintained or increased. This study will examine some of the problems of formulating a rational dividend policy in this industry, suggest some possible solutions, and discuss some recent policies. These comments are restricted to the publicly owned holding companies, most of them based in California, rather than to the associations with guarantee stock.' These holding companies form the bulk of present market values in actively traded stock issues.