A recent Wall Street Journal article noted that, while the effects of the pandemic have receded from many aspects of American life in mid-2024, investors continue to deal with dividend disruptions.  According to the article, of the 187 U.S. companies that suspended dividend payments during the pandemic, all but 47 have resumed payouts.

In the Public Markets, What Do Dividends Signal?

In the public markets, dividends are one of the most direct tools management teams and directors have to “signal” to investors that the paying company has a secure balance sheet and sufficient visibility into future earnings and cash flow generation to commit to quarterly shareholder payouts.  This is in contrast to the signals associated with large — but limited and temporary — share buyback campaigns: the company has a stockpile of cash for which there are limited attractive investment opportunities and/or management, and the directors believe the shares are currently undervalued by the market.  Those can certainly be positive signals for shareholders, but they don’t communicate the same long-term confidence of dividend payments.

So, as the WSJ article speculates, the 47 dividend holdouts (ranging from Carnival and other travel-related stocks to industrial giants like Boeing to retailers like Abercrombie & Fitch) likely see continued volatility or weakness in earnings and/or continue to deal with balance sheet weakness inflicted by the pandemic.

In our experience, most family businesses that survived the pandemic have resumed paying dividends to shareholders.  In contrast to public companies, dividends in family businesses tend to be more about shareholder and corporate liquidity needs than signaling.

What Do Dividend Payments Represent for Family Businesses?

For family businesses, dividend payments represent one among several competing uses for cash flow generated from operations. In lieu of paying dividends, family businesses can do several things, including:

• Expand operations through growth investments in plant, property & equipment
• Complete strategic M&A transactions
• Pay down interest-bearing debt
• Redeem specific shareholders
• Build cash reserves for future operating needs or to brace for adverse earnings trends
• Diversify family holdings by seeding an investment fund or new venture startup

What Do Dividend Payments Represent for Family Shareholders?

For family shareholders, dividends represent one of two potential sources of investment return. Dividend payments are not the only way family shareholders benefit from the business’s earnings.  Other sources of return include:

• Capital appreciation through investments in productive assets supporting the growth of the family business
• Accretive M&A transactions that enhance the family business’s strategic positioning and cash flows (or reduce risk)
• Reducing financial leverage to build shareholder equity in the underlying family business enterprise
• Capital appreciation fueled by accretive repurchases of stock from other (often unengaged or disgruntled) family shareholders
• Untapped cash reserves that allow the family business to weather economic disruptions and be opportunistic investors in times of distress
• Reducing the risk of the family enterprise through diversification

In other words, each potential alternative to dividends for the family business corresponds to a potential source of economic benefit for family shareholders.

However, that does not mean family business directors and shareholders are indifferent to the dividend decision.  Rather, it means that directors and shareholders need a common framework to help them select the “best” use of available corporate cash flow.

Do You Understand the Economic Meaning of Your Family Business to the Family?

We believe that one of the most helpful frameworks available for weighing dividend (and other) decisions is the economic meaning of the family business to the family.  If the family shareholders and directors can align around what the family business means — or ought to mean — to the family, then the weight assigned to the various cash flow alternatives noted above can become “natural” for the family.

We have observed four basic economic meanings for family businesses.

• Economic growth engine for future generations. Some families develop a shared vision of the family business as principally an economic growth engine for future generations.  In that case, growth capital expenditures and M&A will be priorities.
• Store of value. For others, the family business is perceived to be a durable store of value.  Amid the volatility of an evolving and shifting economic landscape, the family business provides the economic ballast for the family’s  Such families are likely to prioritize debt reduction, building cash reserves, and diversification investments.
• Source of wealth accumulation. Other families view the family business as a source of financial independence for its family shareholders.  In other words, family shareholders are encouraged to diminish their economic dependence on the family business by making their own investments and building their own wealth apart from the family business.  In these cases, the family is likely to prioritize larger periodic special dividends and/or targeted shareholder redemptions.
• Source of lifestyle. Finally, the family business can be viewed principally as a source of incremental income facilitating education, travel, philanthropy, cultural experiences, and other amenities that would otherwise be out of reach for family members.  In this case, the stability and durability of the regular dividend payment take priority.

Are You All Dancing to the Same Tune?

With the competing claims on operating cash flow from the perspectives of the family business and family shareholders, managing dividend expectations can be a delicate dance.  Finding and forging consensus on what the family business means to the family can help make sure that everyone is at least dancing to the same tune.

Our family business professionals can help you canvas key stakeholders in your family system to uncover where opportunities for consensus lie.  Give us a call today to discuss your situation in confidence.