Business

Why banks pay ever-larger dividends

By Michael Maiello     
November 23, 2015

From: Magazine

Ever since the 2007–10 financial crisis, banks in the United States have been asking regulators for the right to resume and increase dividend payments to shareholders. Last March, Wells Fargo and BB&T won approval for such a move—while a subsidiary of Santander Holdings USA, the US unit of Banco Santander, was denied. Research by Rice University’s Eric Floyd, University of Toronto’s Nan Li, and Chicago Booth’s Douglas J. Skinner explains why this issue is so important to banks: investors and other stakeholders use the frequency and amount of dividend payments as a proxy for financial strength.

The picture is different in the industrial sector, where most payouts now come in the form of share repurchases (buybacks), which are a more tax-efficient and flexible way for companies to return cash to shareholders. For industrial firms, repurchases now exceed dividends in most years—but as the researchers note, they don’t convey the same message of strength.

chart why banks pay ever larger dividends

“Dividends, at least regular dividends, are a commitment,” says Skinner. “Once a company initiates a regular dividend, it is committed to paying dividends of at least that amount for the indefinite future. There is no such commitment with repurchases.”

In the wake of the financial crisis, investors’ residual skepticism about financial firms’ health has only served to make dividends more important for banks. That means banks are reliable dividend payers and likely to continue to increase their dividends over time. But bank shareholders aren’t just receiving a direct deposit after every quarter; they’re receiving a message.

Eric Floyd, Nan Li, and Douglas J. Skinner, “Payout Policy through the Financial Crisis: The Growth of Repurchases and the Resilience of Dividends,” Working paper, April 2015.

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