Dividends under the spotlight

L&G has recently come came under fire for slashing its final dividend by 50%. Meanwhile, analysts are muttering about Norwich Union, which has announced no changes to its 2009 dividend. There is concern over whether the insurer is correct in wanting to maintain its dividend.

Dividends and what insurers do with them have increasingly come under scrutiny during the credit crisis. The choice on what to do for 2009’s dividend is a difficult one for insurers. Ben Cohen, insurance analyst at Collins Stewart points out the dilemma: “The company should be focused on conserving their capital in general. The comment that L&G’s CEO made about the need to conserve cash is entirely valid. But clearly it’s important if you can to pay a dividend, that’s a key driver of return for shareholders.”

Investors will want insurers to keep their dividend promise, but in the credit crisis insurers will have to be careful about overstretching themselves: “There is a danger if you over distribute at the moment and pay a big dividend it may not be sustainable and you may actually put yourself in financial difficulty further down the line,” said Cohen.

Cohen also warns that companies should implement some prudence about the way in which the dividend is issued. “In the Lloyd’s sector you’ve seen companies raise capital and at the same time actually increase their dividend, which makes no sense to me whatsoever. It’s because they want to show they are confident but I think shareholders see through that.”

So what is the answer to the dilemma? On the one hand insurers want to show their robustness through paying dividends, but on the other hand there is a danger that companies could overstretch themselves. Investors have demonstrated before that if they have concerns they will react even if dividends are maintained. Norwich Union is a case in point, its share price plunged more than 30% when held its full year dividend for 2008.

The answer, feels Cohen, is to not leave investors in the dark. “The later you make the change the more investors will be annoyed about the way that it’s been done. Even if you are still reasonably strong you want to be conservative going forward and recognise that sometimes dividend policies were set in a different bullish environment and there is no harm in stepping back from that.”