CFOs frequently ask whether they should cut dividends to invest in growth. In theory, companies should consider reducing dividends when the funds that would have been used to pay for them are instead invested in initiatives that would generate returns above the company’s cost of capital. In practice, however, almost no well-performing corporations—particularly in stable economic conditions—reduce their dividends in order to fund growth.
What the research shows
Companies usually keep their dividend per share (DPS) levels constant or on an upward trend. Because DPS reductions often come against the backdrop of macroeconomic pressures, disappointing earnings, or even financial distress, they’re associated with a decline in stock price. But how often do CFOs announce that they’re cutting dividends when all is going well?
Almost never, it turns out. We explored, over the decades-long time span of 1995 to 2021, how frequently large companies publicly listed in the United States announced a significant dividend cut—which we define as a DPS reduction of at least 10 percent. We also examined how many of these significant dividend cuts were made in response to material underperformance. We excluded companies that don’t pay a dividend, have variable dividends (such as real estate investment trusts), or underwent a major restructuring (for example, a spin-off).
Virtually no large, stable company made a significant dividend cut out of choice rather than need, let alone to make a bold investment for a future growth initiative.
That left us with 1,225 companies with a multiyear, stable dividend policy. Among them, 71 percent maintained or increased their DPS level without making a significant dividend cut. The remaining 29 percent that announced a significant dividend cut did so when faced with either an economic crisis or a decline in profit of at least 20 percent—or both. Virtually no company over the multidecade period made a significant dividend cut out of choice rather than need, let alone to fund a bold investment for future growth (Exhibit 1).
In fact, on an annual basis, any dividend cut by large public companies is unusual; in a typical year, fewer than 2 percent of the 1,225 companies that we studied reduced dividends at all. The numbers increased only when there was a major economic crisis: more than 5 percent of companies reduced dividends during the 2008–09 credit crisis, and more than 15 percent reduced dividends during the COVID-19 pandemic. But in most years between 1995 and 2021, one could count on two hands—and in many years, on a single hand—the number of companies that reduced dividends at all in any given year (Exhibit 2).
It’s important to note that the scarcity of historical examples does not prove that cutting DPS will necessarily lower the stock price. But it bolsters what many CFOs have told us: they hesitate to reduce dividends because they’re concerned about how “the Street” will react.
Implications and takeaways
CFOs are right to keep attuned to practical realities, including perceptions by investors that a company that cuts its dividends—for whatever stated reason—may actually be signaling weaker earnings and lower cash flows ahead. Those perceptions could drive down the share price, which can become value destroying in itself. For example, a lower share price can make it harder in the short term to attract and retain talented employees; it can also reduce valuable acquisition currency for M&A, since many deals are paid at least in part in company stock. CFOs should consider whether the company is prepared for potential investor blowback, and how executives could ease investor concerns by clearly spelling out the rationale for any dividend cut. They should also run detailed scenarios to determine whether the dividend cut would make a material difference in delivering the expected growth.
Ultimately, changes to a company’s dividend policy should always be part of a CFO’s tool kit—even if that means reducing DPS. But CFOs should understand that there isn’t much precedent: virtually no stable, large companies choose to cut dividends when earnings and economic conditions are strong.