Banking Dividend Freeze

[NeilW]

So in what way does letting the banks keep it but not use it help support the economy that distributing it to the shareholders so they can spend it buying things the economy produces doesn't.

Adrian

It allows them to absorb more losses from bad bank loans before the Bank of England has to step in and put them into administration. Plus it makes the silly ratios the BoE insists upon look better - even though they have little or no control or protection function whatsoever.

[88V8]

.. only RBS are explicitely stating the prefs will still be paid....
Because NWBD have to give extra shares if the dividend is not paid perhaps?
I think that is how it works and why it was not stopped before.

Yes, good point, there's a 4/3 pusher which is peculiar to these shares..

Incidentally, nothing personal and this may not apply to you but why has the board been invaded by several non-HYPers? I've nothing against non-HYPers, reputedly they are human too, but why in the midst of the current problems have they decided to give us the non-benefit of their non-HYPing views which by definition are irrelevant here?

Well it's always good to have new visitors to the most popular Board on the Lemon.
I'm over 60% income equities, but it's also good to be reminded that there are other easily accessible worlds out there, and Prefs do put a foundation beneath one's income at times like these.

V8

[monabri]

To HSBA and to Lloyds investor relations.

Mr Woods is next on the list although I did email them last night.


https://images.app.goo.gl/PYBcytnx31L1uQAs5

[digitaria]

It seems to me that Pyadian principles would now dictate that banks held in HYPs now be sold. This is because the reason for holding them - income - has evaporated, albeit temporarily.

I have - in disgust - sold a tranche of HSBC this morning, but I'm thinking of dumping the rest (they were in 2 accounts so I couldn't sell the lot in one transaction).

[88V8]

I have - in disgust - sold a tranche of HSBC this morning, but I'm thinking of dumping the rest....

I used routinely to sell cutters, but it dunnarf eat up one's capital.
OK if you're up of course, and looking to tidy your CGT.

The banks will come back, eventually.

V8

[idpickering]

To HSBA and to Lloyds investor relations.

Mr Woods is next on the list although I did email them last night.


https://images.app.goo.gl/PYBcytnx31L1uQAs5

As much as I admire your efforts, and support them too, as I hold both these shares, I realise I am but a small cog in the thousands of shareholders. I know my voice won’t count for much. As a HYPer I am disappointed in the loss of the dividends, but I’m prepared to wait for better times when they resume paying out. I feel for those that need the income now.

My current planning involves doing nothing with my current holdings, and just carrying on topping up viable holdings in my HYP on a monthly basis, and think longer term that just today. Good luck all.

Ian.

[digitaria]

I used routinely to sell cutters, but it dunnarf eat up one's capital.
OK if you're up of course, and looking to tidy your CGT.

The banks will come back, eventually.

V8

They way I see it, I have a chunk of capital - rather less than before - which will sit doing nothing for a year, unless I recycle it into something else.

Question is, what?

I was considering the prefs - could get LLPC at 112p. But perhaps the sector is just toxic for now.

[OLTB]

It seems to me that Pyadian principles would now dictate that banks held in HYPs now be sold. This is because the reason for holding them - income - has evaporated, albeit temporarily.

I have - in disgust - sold a tranche of HSBC this morning, but I'm thinking of dumping the rest (they were in 2 accounts so I couldn't sell the lot in one transaction).

Hi digitaria

I understand that Pyadian principles dictate never choosing to sell unless forced to (takeover/insolvency). I wont be selling as fortunately I'm still working and not relying on the income - for those in retirement, selling may be the best option in order to keep a continuing cashflow! Have you made a decision about where to reinvest the proceeds of your sold HSBC shares?

Cheers, OLTB.

[idpickering]

I used routinely to sell cutters, but it dunnarf eat up one's capital.
OK if you're up of course, and looking to tidy your CGT.

The banks will come back, eventually.

V8

They way I see it, I have a chunk of capital - rather less than before - which will sit doing nothing for a year, unless I recycle it into something else.

Question is, what?

I was considering the prefs - could get LLPC at 112p. But perhaps the sector is just toxic for now.

I’m not selling anything. I don’t want to make my losses on paper a reality. I wouldn’t buy any of these cutters now though.

Ian.

[digitaria]

Hi digitaria

I understand that Pyadian principles dictate never choosing to sell unless forced to (takeover/insolvency). I wont be selling as fortunately I'm still working and not relying on the income - for those in retirement, selling may be the best option in order to keep a continuing cashflow! Have you made a decision about where to reinvest the proceeds of your sold HSBC shares?

Cheers, OLTB.

I suppose a temporary dividend hiatus is a special case.

In answer to your question, no, I haven't decided. And I haven't yet dumped all of my HSBC shares, but I'm finding little reason to hold on to them.

[onthemove]

I'll be peed off if they suspend the divi, but those that are cumulative will have to be paid eventually, which is more than canm be said for the divis on the ords.

Not strictly true re. ords.

Shareholders are entitled to the residual profits. If they scrap the ord dividend now, it means more money retained. That money still 'belongs' to the ordinary shareholders - it's still the residual profits, etc.

It's just that company is holding onto it for a little longer to act as a buffer. This means better chance of the company surviving and paying future dividends.

If withholding the dividend payments turns out not to have been necessary, it can be paid out at a later date...

It is strictly true re ords.

Equity (ie. ord) divs are entirely discretionary because there is no contractual obligation for a company to pay any ord dividend at all. In contrast, prefs (ie. non equity) divs do have such a contractual obligation with normally a fixed percentage return, usually cumulative too. Equity shareholders are not therefore "entitled" to anything by way of div.

Furthermore and for the same reason, holding on to suspended ord divs does not require any back omitted payouts to be made up in future.

Seems that the bank div freeze is a political move from the authority rather than a necessary financial one to help out the banks but it is what it is and the reasons are probably not important. Manure happens. In bad times divs get hammered, it's happened before to HYPs and will happen again.

Incidentally, nothing personal and this may not apply to you but why has the board been invaded by several non-HYPers? I've nothing against non-HYPers, reputedly they are human too, but why in the midst of the current problems have they decided to give us the non-benefit of their non-HYPing views which by definition are irrelevant here?

I disagree.

"Ordinary shareholders have the right to a corporation's residual profits. In other words, they are entitled to receive dividends if any are available after the company pays dividends on preferred shares." https://www.investopedia.com/terms/o/ordinaryshares.asp

If the directors had already deemed the money they were to pay out now as being residual profits to which shareholders had the rights, then if at this moment in time they are forced / strong armed / whatever into holding back that payment, that in itself doesn't change the status of those residual profits in the company.

The shareholders still have the right to those residual profits.
Those residual profits are still there, they haven't been forfeited, a Corbyn government hasn't confiscated them, etc.

And if in 12months time that money is still there and the company still trading, then the shareholders will still have the right to it.

Now the directors might instead choose to invest that in some way or other rather so that in 12 months the money is no longer available, but this is a choice they could have made irrespective - they could still have reduced dividend payments and chosen to invest instead - but they didn't.

You say it is discretionary - and you are right - but you miss the point that the directors have already used their discretion to assign those residual profits to shareholders, and have only been prevented from making the payment due to political pressure.

The suspension of the dividend due to external pressure in this case, does not in itself introduce any reason why those same residual profits that the directors already used their discretion to earmark for payment to shareholders, shouldn't then be rescheduled for distribution to shareholders at a later date by the same directors.

There is no direct, consequential reason - assuming the company doesn't get into difficulty (in which case prefs might then be at risk as well) - as to why the currently anticipated, but now scrapped payments, won't be available for payment in future.

Please understand that posts here are relatively short, and not intended to be an absolutely watertight coverage of every single nuance of the law.

I mean take for example the post I was originally replying to …

"...those that are cumulative will have to be paid eventually..."

Strictly pedantically that is also false, but I respected the spirit in which it was made.

If the company goes out of business (e.g. as a result of the current crisis or whatever) and has not enough assets remaining to pay all higher priority creditors, then the cumulative preference dividends will categorically never then be paid.

But I didn't challenge that because in the current circumstances there are no grounds to believe the company would end up in such a state that that would be relevant.

In the same spirit, my response was looking pragmatically at the consequences of the company being forced through political pressure to withhold payments that the directors had already used their discretion to assign to shareholders.

That political pressure, doesn't change the status of the residual profits in terms of shareholders entitlement to them, and doesn't change the grounds for directors to again use their same discretion in future to pay them out.

That's not to say there won't be other factors, not yet in play, that cause the directors to change their mind in future- but that would not be a direct consequence of the current suspension...

So in the context of my original reply, I felt there was no reason for the person I was responding to, to need to use such a downbeat statement as "the same can't be said for".

While in an absolutely strict legal sense, it may be technically correct, in the actual practical real world situation right now, there's no direct, un-emotional, consequential reason to presume the money will not eventually be paid out somehow or other (whether a special dividend next year directly declared as being this years payment deferred, or more discretely and gradually through marginally higher dividend increases in future years compared to what would have been, etc).

[jackdaww]

DAK if any insurer's - in particular legal and general - might be told to cut ?

[PinkDalek]

DAK if any insurer's - ... - might be told to cut ?

You may have missed the existing Topic on the subject:

Insurers
viewtopic.php?f=15&t=22678

That would be good place to continue.

[scrumpyjack]

Interesting article in the Torygraph
https://www.telegraph.co.uk/business/20 ... investors/

Basically saying this has only been done because the ECB told EU banks not to pay dividends. Many of the EU banks are far far weaker and less well reserved. Before the ECB edict the BoE was relaxed about UK banks paying dividends as they were so well reserved.

So this is just ' populist grandstanding by the Bank'

[monabri]

Interesting article in the Torygraph
https://www.telegraph.co.uk/business/20 ... investors/

Basically saying this has only been done because the ECB told EU banks not to pay dividends. Many of the EU banks are far far weaker and less well reserved. Before the ECB edict the BoE was relaxed about UK banks paying dividends as they were so well reserved.

So this is just ' populist grandstanding by the Bank'

That's my understanding of the situation - we may have discussed it already (possibly?).

Note : Swiss banks are not falling into line with the ECB. (and, of course, neither are the US).

[Dod101]

And that of course just makes it all the worse.

Dod

[monabri]

I had a brief glance at the RNS from Standard (STAN) * ...

"However, suspending shareholder distributions at this time will allow the Group to maximise its support for individuals, businesses and the communities in which it operates whilst at the same time preserving strong capital ratios and investing to transform the business for the long term."

I think I can see a hole in that statement!


* no holding - but bi-curious!

[Holts]

Possible the banks are preparing for more pressure from govt for a bunch of giveaways , being cynical remember the ppi gravy train has ended . On the basis of the penalty terms in NWBD prospectus bought some more .

[Dod101]

With HSBC, I have a very long standing holding in certificates. No need to worry about tax on dividends there for the next tax year! I have more in an ISA which I think I will sell tomorrow and buy 3i infrastructure. The yield is under 4% and the share price is more or less at NAV as far as I think anyone can tell these days so apologies, that is not really a HYP share. I will probably keep the certificated parcel because I would expect the share price to rebound before too long. They are not paying a dividend so that adds to the value in the business and hopefully they will not be told to give away loans to help the distressed. I will need to think hard about whether they care a long term hold or not, but they have suddenly changed from being an income share to being a value share I suppose.

I think the invasion of non HYPers is very simple to explain. It is because we are all becoming non HYPers in the current investment climate.
Who could possibly identify a suitable share following HYP principles at the moment?

Dod

[dealtn]

Sorry it isn't the same thing at all for anyone who is a forced seller now because they need the income.

Situation 1 - dividend paid.

Holder gets income and retains same number of shares. Gets further dividends in future.


Situation 2 - dividend not paid.

Holder has to sell shares to get income corresponding to missed dividend. In future holder gets less income since has fewer shares. Someone else gets income from the shares which were sold in the future when dividends are resumed. The fact that the missed dividends are retained and will likely be paid out later means little to the holder as at least some of those retained dividends will now be paid to someone else.

No it really doesn't work like that. There is a lot of confusion here, and no doubt anger too. This is Finance Theory, and to do with Retained Earnings, and whether it matters if earnings are paid out or not.

Forget its a Bank, and forget all politics etc.

If a company exists that holds a single asset, say cash, and its earnings are simply the interest on that cash you might have the situation where on average the asset is worth 100p over a period, and earns 10p "interest" over that period as interest accumulates. With a perfect stockmarket the share price starts at 95p climbs linearly to 105p over the period, and if the 10p earnings are declared and paid out in full reducing the price to 95p again.

A holder of this stock has 10p return, on the 100p (average) share price. And this gets repeated every period ad infinitum.

Now if in a single period a new law came out that prohibited all payments of "dividends" the share price at the start of the new period is 105p, climbs by 11p (due to compounding, earnings on the retained earnings) ending at 116p. If dividends are now allowed to be paid again, then a new dividend off 11p is paid out to holders with the share price falling to 105p. Repeat ad infinitum again. (The maths is very slightly out but not wishing to complicate unnecessarily).

So a holder at the end of the first period who "needed" the dividend could sell 10% of the shares to raise the equivalent of 10p, and now hold 90%. Someone else owns 10% of his holding. BUT the company is now worth more due to the retained earnings, and pays out 11p dividends going forward. Such a holder has 90% of 11p dividends instead of 100% of 10p dividends (again the maths is slightly inaccurate here to keep the "language" easier).

So a holder can "manufacture" his cashflows by selling 10% of the holding to reflect the same profile if the dividend cut wasn't "banned".
Hopefully this simple example helps explain this, rather than having to complicate it with the maths. The big issue with the share price here is nothing to do with the dividend, but it looks that way as that is the "news" that has moved the price.

The real price mover is (assuming we believe in perfect markets) the repricing of the risk of holding such a share. In our above example the asset remains the same, and should be valued at 100p, on average. But the market is now pricing that asset at say 90% of its real value, because if a law can be introduced to "ban dividends" then what is to stop other laws also affecting the business?

In the case of banks, and no longer a theoretical example, such as compulsory lending to bankrupt firms, retaining extra unproductive capital going forward, and other such negatives.