B&Q looks to conserve cash by cutting the shareholders’ dividend

What is a good way for quoted companies to save cash for a rainy day?  Cut the annual dividends paid to shareholders.  DIY retailer B&Q is the latest example of a company that has decided to take this action in the face of a downturn in consumer spending.

B&Q owner Kingfisher today halved its dividend and reported a drop in annual profits.

Against the worsening economic outlook, Kingfisher is slashing its final dividend by 50% to 3.4p per share, and plans a similar reduction for the interim dividend, which will save a total of £120m.

Ian Cheshire, the new CEO of BN&Q also announced plans to reduce capital investment by 25 per cent in an attempt to create a far “leaner and fitter” business.

Both these moves are designed to conserve the cash balances of the business at a time when consumer demand in the retail sector, including DIY, is weakening.  The option to cut a dividend is not taken lightly.  Over time, shareholders develop expectations about what the annual dividend paid on a share will be.  The dividends provides one part of the returns that shareholders obtain from owning shares in the company (the other being any capital gain, or rise in the share price) that occurs whilst they are shareholders.

However, the board of B&Q has clearly taken the view that maximising the cash flow of the business is the short-term priority.  In effect, they are reinvesting the dividend foregone.

Cheshire is quoted in The Times as saying:

“We have to get our heads down and focus on getting returns up, then the share price will take care of itself. ”

It will be interesting to see how many more quoted companies take the opportunity of the prevailing economic uncertainty as the trigger to cut dividends.

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