THE END OF A SURE THING
IN CHANGE OF POLICY, AT&T CUTS DIVIDEND - AND MORE
FIRMS ARE FOLLOWING SUIT
By Dolores Kong
The Boston Globe
As part of the third generation in her family to own
AT&T stock, and with an aunt who had worked for Ma
Bell for four decades, Priscilla Buchanan, 68, once
viewed the company as a bedrock investment.
"Mom, apple pie, and AT&T, it used to be," said
Buchanan, who lives in a western suburb of Boston.
"Not any more."
No more indeed. As shareholders of AT&T are about to
find out today when their quarterly dividend payments
will reflect an 83 percent cut - the first such
decrease in the company's 125-year history - it's
definitely not the same old Ma Bell any more.
Buchanan doesn't own much AT&T now, only about 150
shares, so those dividends don't to add up to much
even in good times. But as a retiree, she does rely on
quarterly payouts from some of her other investments,
such as utility stocks, for income.
AT&T - once the most widely held company in America
and the epitome of a "widows and orphans" stock for
its reliable, sizable quarterly dividend - is not
alone in cutting its dividend.
Joining Ma Bell in recently slashing or suspending the
regular cash payouts that people on a fixed income
have traditionally relied upon: J.C. Penney, Pacific
Gas & Electric, Xerox, and banks like BankOne and
These companies have cut dividends because they're
currently facing financial troubles and need the cash,
but they also represent a broader corporate trend
toward shrinking payouts that extends beyond just
firms with money problems.
For the millions of widows, orphans, retirees, and
others who may have come to count on their quarterly
dividends, the trend could have a far-reaching impact.
"I don't think there are any more quintessential
`widows and orphans' stocks in this market," said
Charles B. Carlson, editor of the DRIP Investor, a
newsletter for people interested in so-called dividend
"The rules have changed out there. There's a lot of
fear," said Carlson, who is also author of a new
report for owners of Ma Bell and her spinoffs, called
"AT&T Tax Wizard."
Among the rule changes that researchers and industry
analysts cite: increasingly less favorable tax
treatment of dividends vs. long- term capital gains,
and a new-economy emphasis on reinvesting earnings for
growth and, hopefully, stock price appreciation,
rather than just paying out cash dividends to
One group of researchers studying this broader trend
has even published an academic paper titled
Since the 1960s, the percentage of firms paying cash
dividends has fallen dramatically, from 71.6 percent
in the mid-1960s to 20.8 percent in 1999, according to
the paper by Eugene F. Fama of the University of
Chicago's Graduate School of Business and Kenneth R.
French of the Massachusetts Institute of Technology's
Sloan School of Management. The paper is part of a
series by the Center for Research in Security Prices.
"I think there will be a day when dividends don't
matter anymore," agreed Alan Auerbach, a professor of
economics at the University of California, Berkeley,
who has also studied trends in dividends.
Other data, from Standard & Poor's and Ibbotson
Associates, also suggest the decreasing importance of
For instance, last year's dividend payout ratio for
the companies that make up the S&P 500 index appears
likely to be the lowest ever since 1926, when Standard
& Poor's first began keeping track of the data,
according to Arnold Kaufman, editor of S&P's Outlook
newsletter, based in New York.
The preliminary payout ratio for last year - dividends
as a proportion of earnings - is about 30.5 percent,
when the historic average has been 57 percent. "It is
amazing," Kaufman said. Among the reasons he cited for
the shrinking ratio: the changing makeup of companies
in the S&P 500 over time, with fewer of them now
likely to pay dividends.
And the data from Chicago-based Ibbotson show that
while the S&P 500's dividend yield as a percentage of
total stock market return stayed fairly stable between
1926 and the mid-1980s - at about 30 percent - it has
since dropped to about 10 percent, according to Peng
Chen, vice president in Ibbotson's research
department. So if the stock market hypothetically
returns 20 percent in a year, that means the dividend
yield today is 2 percent, vs. the 6 percent of years
Chen attributed the change in the dividend yield in
part to the "spectacular stock returns over the past
two decades." In the face of big stock-price
increases, the yield shrinks even when the dividend
dollar amount stays the same, since the yield
represents dividends as a proportion of stock prices.
He also cited tax-policy and new- economy reasons for
the smaller yield.
But it's too soon to write the obituary for dividends,
say S&P's Kaufman, Ibbotson's Chen, and DRIP
"I do suspect that we may be prematurely announcing
the death of dividends," said Kaufman. "It's
conceivable they could get a new life, a second wind."
"I don't think there will be disappearing dividends,"
said Chen. If a company can't find a good way to
reinvest earnings, "I think investors would prefer the
money goes to them" rather than into a big cash
reserve for the firm, he said.
Especially after last year's volatile stock market,
"having dividends is kind of a nice shelter in the
storm when you can't really depend on capital gains,"
"I wouldn't be surprised to see companies - even in an
environment of a slowing economy - raising dividends
at a greater rate than before because investors start
to demand that they do so."
Indeed, some mutual fund officials seem to think
investors will continue to want dividends, judging by
a recent full-page newspaper ad for the Fidelity
Dividend Growth fund, and a Morningstar.com listing of
15 fund families featuring the word "dividend" in some
of their offerings.
Carlson, in his most recent DRIP Investor newsletter,
picked AT&T as the best-performing Dow stock for this
year, not because of its dividend but because it was
the worst-performing Dow stock last year, down 66
percent for 2000.
Despite some investors' continued interest in
dividends, some business professors say that from a
tax standpoint it doesn't make much sense. Such cash
payouts are taxed at the less favorable ordinary
income rates, starting at 15 percent and going all the
way up to 39.6 percent, under current federal law.
The federal long-term capital gains tax rate, on the
other hand, on the sale of shares owned at least a
year is either 10 or 20 percent, depending on your
income tax bracket. And under a new US tax law, the
rate on the sale of shares owned at least five years
will be 8 or 18 percent, depending on your bracket.
"It's OK to sell some of the stock in exchange for not
getting dividends," said John H. Cochrane, professor
of finance at the University of Chicago, who is
currently a visiting professor at the University of
California, Los Angeles.
"Instead of getting $100 in dividends every quarter,
sell $100 worth of stock every quarter. Then you'll
pay capital gains and not ordinary income tax," said
Cochrane, who has written a paper on "New Facts in
Finance" for the Cambridge-based National Bureau of
But it's not easy convincing generations of investors
who have come to rely on dividends for retirement
income, says Berkeley's Auerbach. "People stress
financial education for younger people, but this also
suggests it's important for older people," he said, so
they won't get caught short by disappearing dividends.
That's probably not a lesson that AT&T employees and
retirees or pension fund officials want to learn right
now, if they have large holdings in the company's
On top of the 83 percent cut in quarterly dividend to
3.75 cents a share, from 22 cents, that's showing up
for the first time in today's payout, AT&T on Monday
announced a 45-cents-a-share loss for the fourth
quarter, compared with profits of 36 cents a share for
the same period a year ago. And the company's stock
price is down about 50 percent since the beginning of
Sumanta Ray, an analyst with ATTinsider.com, a Web
site sponsored by Communications Workers of America,
which represents 35,000 AT&T employees, has his finger
on the pulse of investor sentiment. "We know . . .
from our members who come to the site, that they are
concerned," said Ray. "People who are close to
retirement invested a lot of their extra savings
dollars in AT&T stock with the expectation of some
growth and yield."
Ray added: "I've also been talking to institutional
investors, and they don't like it either," since many
of them hold large blocks of AT&T stock as part of
pension fund investments. Among the large holders of
AT&T stock as of September 2000, according to his
research: Fidelity, the California teachers retirement
fund, and Harvard College.
For retired Peabody schoolteacher Mary Enos, who along
with her husband recently bought some shares in AT&T
because of its beaten-up share price, the cut in
dividends effective today doesn't really matter.
"You'd have to have a pretty hefty chunk to have a
pretty good dividend. I'm not in that category," said
Enos, 66, adding she and her husband plan to hold on
to the stock long term for what they hope will be
"AT&T is a good company. It has to be. I can't imagine
that it could disappear."