Do dividend payouts increase or decrease during crises?

John D Rockefeller once said dividends are a man’s best friend. Empirical research shows shareholders, particularly those investing in developing economies, prefer companies that pay cash dividends to those that retain earnings. Companies often retain earnings to fund expansion or research and development. Others use earnings to repay debt or undertake mergers and acquisitions (M&A).

Many factors influence shareholders’ preferences for cash dividends, including tax rates and the need for income. Shareholders also interpret dividend payments (or lack of them) as signals about the company’s financial health and prospects. Declaration of a cash dividend is usually interpreted as good news, and a cut or omission is seen as a negative signal.

The signalling theory has been used widely to explain why companies operating in developed economies tend to increase dividends in economic and financial crises. Though definitions vary, a crisis is usually an event that has a sudden and big negative effect on economic growth and prosperity. Examples include the Wall Street crash of October 1929 and the bursting of the dot.com bubble in March 2000.

To investigate dividend-paying behaviour of JSE-listed companies during crisis periods we collected financial and economic data over 1979-2021. Dividend payout ratios were downloaded from the Iress and Bloomberg databases. This ratio reflects the percentage of attributable earnings a company distributed to its ordinary shareholders in the form of cash dividends in a particular year. In line with other scholars, we did not consider special or script dividends, or share repurchases.

Economic data was collected from Stellenbosch University’s Bureau for Economic Research (BER), which classifies a “crisis year” as one with a negative year-on-year change in real GDP. Using this classification, eight crisis years were identified, the first three being 1982, 1983 and 1985.  During this volatile period, the economy was under severe pressure. Not only did local banks and companies have to contend with international anti-apartheid sanctions and boycotts, they also had to deal with widespread social unrest.

Sociopolitical uncertainty probably contributed to negative changes in year-on-year real gross GDP experienced in 1990, 1991 and 1992. The classification of 2009 as a crisis year comes as no surprise given the adverse effects of the global financial crisis on the local economy. The same applies to the effects of  Covid-19 in 2020.

We found that over the 43 years covered in our research the typical dividend-paying JSE-listed company distributed a large percentage of its earnings in the form of cash dividend (44.47%). Companies operating in the financial sector (banks, insurers, real estate and investment companies) had the highest average dividend payout ratios over the period.

The five years with the lowest average dividend payout ratios were 1981 (39.48%), 1989 (38.21%), 1995 (39.55%), 1996 (39.52%) and 2021 (37.77%). The average dividend payout ratio in 2021 was the lowest of the entire period under consideration. Though the BER classified none of these years as a crisis year, they all occurred in periods of substantial economic and/or sociopolitical uncertainty in the country.

The average annual dividend payout ratios of companies during BER-classified crisis years were virtually the same as in non-crisis years (44.23% vs 44.53%). By contrast, the proportion of JSE-listed companies that paid dividends in a crisis year relative to all companies listed on the bourse was significantly lower (36.63%) than in non-crisis years (46.81%). The proportion of dividend-paying JSE-listed companies decreased more than 10% (48.10% to 37.16%) from 2019 to 2020 and even further to 31.79% in 2021.

Though the dividend decision is a complex one, our findings seem to suggest that managers of JSE-listed companies do not follow the same approach to paying dividends during crises than their counterparts in developed economies. And local managers have a point. If a company distributes too much of its current earnings it might experience cash shortages in future. Raising extra cash could be costly if financial market conditions deteriorate. It is also worth noting that companies operating in emerging economies generally have less government support to weather economic storms than those in developed economies.

Shareholders of JSE-listed companies that favour dividends over retention-generated capital gains should be mindful of the prudent approach used by these companies when it comes to distributing their earnings, particularly in crises. Shareholders should also note that crises do not always affect dividend payments of local companies adversely. Context plays an important role.

• Fuller and Dos Santos were postgraduate students in the department of business management at Stellenbosch University in 2021 and 2022 respectively. Viviers and Mans-Kemp are professors in the same department. They write in their personal capacities.