Commentary: Annual Dividends? Let The Shareholders Decide

Harry M.J. Kraemer Jr., chairman and chief executive of Baxter International Inc., was bracing to get an earful from shareholders. Every Apr. 1 for more than 40 years, the medical-products company had mailed quarterly dividend checks to its shareholders. No more. Joining a growing roster of companies that includes Walt Disney Co. and McDonald's Corp., Baxter tossed tradition out the window early this year and switched to an annual payment schedule. Kraemer hasn't soothed all of the unhappy shareholders, but he believes they will be calmed by the savings--which are expected to exceed $1.5 million a year. "I would be very surprised if a majority of companies did not move to an annual dividend within four or five years," he predicts.

U.S. corporations are chipping away at that bedrock of stock ownership, the quarterly dividend, choosing instead to reward shareholders only once a year. And on one level, at least, it is a good idea: Sending out one check every 12 months rather than every three months saves the company the cost of printing and distributing checks. That can be considerable for companies with large numbers of small stockholders and small dividend payouts. Such savings can benefit shareholders by boosting profits and, theoretically at least, share prices.

BLUE CHIPS. But switching to annual dividends poses a more immediate concern from the shareholder standpoint. Some $365 billion was paid out in dividends last year. And if this money was paid annually rather than quarterly, shareholders would lose the interest on those quarterly payouts amounting to $6.7 billion, assuming a 5% rate of interest. Annual payments would allow those benefits to flow to the companies, allowing them to spend it elsewhere, perhaps on capital projects or paying off debt. So the quarterly vs. annual issue poses a dilemma: Who should get all that money faster, shareholders or their companies?

The benefits of a move to an annual dividend are greatest at companies like Disney and McDonald's--corporations with billions of shares that are widely held by small investors and which pay minimal quarterly dividends. Among other blue chips in this category, AT&T and Wal-Mart Stores Inc., which each distribute more than 1 million dividend payments a quarter, say they're looking at annual payouts. So is Coca Cola Co., also widely held by individual investors.

Disney and McDonald's are good examples of the benefits of annual dividends for such companies. Half of Disney shareholders own ten shares or less. Disney had to send out some 850,000 checks for less than 52.5 cents each every quarter until it led the move to yearly payments in 1999. Similarly, almost two-thirds of the McDonald's dividend checks were for under $1 until it switched over.

But even corporations that cut far fewer child-size checks are making the move--among them, UnitedHealth Group, Waste Management, and Allmerica Financial Corp. And no wonder--in addition to logistical costs, companies that pay annual dividends are hanging on to money that would have gone on to shareholders. Coca-Cola, for instance, gives out $420 million in dividends every quarter. Just parking its dividend payouts in three-month bank certificates of deposit would yield upwards of $30 million in interest a year. Or the company could pay down debt and save even more.

That factor is rarely advanced as a reason for annual dividends. And indeed, for most companies, bookkeeping costs are a nonissue. Disney and McDonald's "are really the exception, not the rule," notes Mary Ann Buttera, senior vice-president of ADP Communications Services, which processes dividends. Typically, she notes, shareholders receive dividends electronically, reducing the costly ritual of mailing dividend checks.

Fears of shareholder unease persuaded 3M and Home Depot to stick with quarterly payments. And no change is contemplated at IBM, whose 700,000 shareholders mainly get their dividends electronically. Other companies should similarly listen to their shareholders when considering such a switch--perhaps by submitting the matter to a shareholder vote. Yes, quarterly dividends can be a burden for some companies. But shareholders should decide if annual dividends are in their best interests.

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