Dividend Policy: Standard Chartered (Assessed Blog 4)

“Standard Chartered reiterated that it has no plans to turn to the market to bolster its capital position, instead setting out plans to cut capital-intensive risk assets and to sell and exit under-performing businesses, as the emerging markets bank maintained its dividend despite a 30% drop in pre-tax profit in 2014” (Morning Star, 2015, para. 1)

Standard Chartered is British multinational banking and financial services company headquartered in London which conducts most of its business in Asia, Africa and the Middle East (Financial Times, 2015). The company have recently announced that pre-tax profit fell to $4.24 billion in 2014 from $6.06 billion in 2013, a fall of a staggering $1.82bn (30%)! The company blamed tough market conditions, low interest rates, low volatility, high levels of liquidity, and changing regulations, for their disappointing performance in 2014 (Standard Chartered, 2015).  

Nevertheless, Standard Chartered shares surprisingly reacted positively to the bank's earnings statement [See Figure 1], signalling investors have confidence in the future direction of the company despite the significant fall in this years profits. Investors could have perhaps been influenced by Standard Chartered claim to have a ‘comprehensive programme’ of ongoing actions to return Standard Chartered to sustainable profitable growth which include a cost savings of more than $400 million for 2015 with a total of $1.8 billion targeted over the next 3 years (Standard Chartered, 2015). This, combined with the company’s reluctance to cut dividends may send signals to the market that the company is really striving to achieve its objectives, which will generate greater shareholder wealth in the future.

Figure 1: Share price when the 30% decline in earning was announced 

Source: Standard Chartered (2015b)

This example is very similar to that of Statoil presented in lecture 7. However the case of Standard Chartered is slightly bizarre in my opinion. This is because banks traditionally tend to cut dividends right away when profitability falls as indicated in the Financial Times article (2010) Italian banks to slash pay-outs presented in the lecture regarding the 2007-2008 financial crises. On the other hand, it could be argued that Standard Chartered did not want to cut dividends due to the clientele effect (Moles & Terry, 1997).

In this instance, the clientele effect is Standard Chartered’s ability to attract and retain particular types of investors using their dividend policy. In addition, consistent will Gordon (1959), I believe many individual shareholders suffer from short-termism. Investors would rather have money now in the form of dividends rather than leave it tied up with Standard Chartered for the foreseeable future especially in the wake of this significant fall in profitability as investors may be unsure about the future direction of the company. I also believe that Standard Chartered are aware of this principle, thus deciding not to reduce dividends in fear that investors may “cash-out” and invest elsewhere. Clearly stating the plans for the future may have been an attempt to try to alleviate this uncertainty for investors. This is very much contrary to Modigliani and Millar's (1961) Dividend Irrelevance Theory. Similarly to the Statoil example, institutional investors make up a large percentage of the Standard Chartered’s shareholders as demonstrated below [See Figure 2]. The top 10 largest shareholders in Standard Chartered hold over 50% of total shares. Institutional investors tend to invest in companies which payout high dividends, therefore Standard Chartered will not want to dissatisfy these investors, as they may sell their shares and find a company which will meet their needs of high dividend payments (Hirschman, 1970). Thus the company has decided to payout a high dividend in hope of retaining these investors.

Figure 2: Largest Shareholders of Standard Chartered 2015

Source: OSIRIS (2015)

Pettit (1972) argues that the use of dividends as an information disseminating device is inefficient since it is an imperfect means of describing the firms' future prospects. He believed that publishing managerial expectations might reduce uncertainty for investors better than the conveying of information through dividend changes. I believe this is occurring with Standard Chartered, if the company was to pay out a lower dividend, it would send signals to the market that the company may be performing badly (which would be a reasonable assumption given the profitability figures). However, the company has good future plans to regenerate profitability and shareholder wealth and clearly does not want investors sell their shares, which would likely result in the devaluation of the firm. Instead, they have maintained a similar dividend to prior years, and released a big statement to reduce investor uncertainty, thus investors will be less likely to “jump the gun” and sell their shares.

Although Standard Chartered have had a bad year,I believe they refused to cut dividends because the future looks brighter for shareholders. In addition, they did not want to upset their large institutional investors who hold a large proportion of equity. The company’s recent announcement clearly transmits this message to investors, clearly stating the company’s intentions to regain profitability and shareholder wealth. Investors are clearly satisfied enough with this information, which is evident in the company's share price. The word information has been highlighted because information is key to reducing uncertainty and risk. If Standard Chartered did not have a detailed response as to how profitability and shareholder wealth could be regained, the shareholders would be extremely anxious and would be likely to sell their shares, which would subsequently devalue the firm.

References

Moles, P. & Terry, N. (1997).The Handbook of International Financial Terms: Clientele effect. Oxford University Press.

Financial Times (2010). Italian banks to slash pay-outs. Retrieved 6^th March 2015, from http://www.ft.com/cms/s/0/98f76256-df9b-11df-bed9-00144feabdc0.html#axzz3TzhUEEs8

Financial Times (2015). Standard Chartered chief Peter Sands waives bonus as profits slide. Retrieved 06^th March 2015, from http://www.ft.com/cms/s/0/06508694-c24a-11e4-bd9f-00144feab7de.html#axzz3Tbs9iRGP

Gordon, M. J. (1962). The savings investment and valuation of a corporation. The Review of Economics and Statistics, 44(1), 37-51. Retrieved from jstor http://www.jstor.org/  

Hirschman, A. O. (1970). Exit, voice and loyalty: Responses to decline in firms, organizations and states. Cambridge, Mass: Harvard University Press.

Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), 411-433. doi:10.1086/294442

Morning Star (2015). Standard Chartered Rejects Capital Raising As Profit Drops 30%. Retrieved 06^th March 2015, from http://www.morningstar.co.uk/uk/news/AN_1425464041282392800/update-standard-chartered-rejects-capital-raising-as-profit-drops-30.aspx

OSIRIS (2015). STANDARD CHARTERED PLC. Retrieved 10^th March 2015, from https://osiris.bvdinfo.com/  

Pettit, R. R. (1972). Dividend announcements, security performance, and capital market efficiency. The Journal of Finance, 27(5), 993-1007. doi:10.1111/j.1540-6261.1972.tb03018.x

Standard Chartered (2015a). 2014 full year results: profits are down but there is a plan of action. Retrieved 06^th March 2015, from https://www.sc.com/en/news-and-media/news/global/2015-03-04-full-year-results-2014.html

Standard Chartered (2015b). Share information. Retrieved 06^th March 2015, from http://investors.sc.com/en/stockquote.cfm