Companies are dividing into dividend cutters and dividend holders. Why wouldn’t a board cut shareholder payouts as the world contends with the indeterminate costs of a pandemic? One reason is that directors are fearful of being criticized for depriving investors of income, and the wider economy of fuel. That argument is not good enough when companies need maximum financial flexibility.

U.S. companies generally shed excess cash through share buybacks, but dividends form a bigger contribution to investment returns in Europe and especially the U.K. Recent cuts have been significant. Bank of America Corp. analysts have reduced their dividend-per-share expectations for the Euro Stoxx 50 by 21% for payouts relating to 2019. This is being driven mainly by the financial, discretionary consumer and industrial sectors.

Financial regulators in the U.K. and Europe are forcing or nudging dividend cuts. Even if boards think their businesses can afford to maintain dividends, going against even a non-binding regulatory preference usually carries a cost of some sort. Wall Street banks aren’t under such pressure yet — hence Goldman Sachs Group Inc. on Wednesday indicated it would hold its dividend.

Some companies are cutting payouts as an implicit or explicit condition of government support. Adidas AG this week announced a dividend cut alongside 3 billion euros ($3.3 billion) of loans, mainly from Germany’s state lender.

But there are good reasons to suspend dividends voluntarily. It’s wise to conserve cash when revenue is under pressure and the equity market might be hard to rely on as a source of funds. A company risks losing the support of society if it pays out cash to shareholders while forcing pain on staff, or while benefiting from taxpayer-funded crisis measures.

The idea that dividend cuts could exacerbate economic woe is unpersuasive. Reduced dividend income shouldn’t imperil pensions. Monthly payments to retirees in a defined-benefit pension plan won’t necessarily be a direct feed of dividend income. Rather, dividends from portfolio companies will typically get reinvested in the fund. Existing cash holdings, supplemented by the ad hoc sale of shares and other assets — as well as by dividends — should deliver the plan’s obligations to its members. The overall value of the assets is what counts.

The trickier issue is individual shareholders who have chosen to use stock-based portfolios for income even though dividends are discretionary. The marketing hype of the finance industry may be a culprit here, having persuaded investors that stocks are like “magic bonds,” as pensions expert John Ralfe has argued. For many investors, selling shares to generate cash in lieu of dividends feels like giving up some wealth. The psychology is deeply ingrained. Falling share prices make it harder to make the leap. But that’s the nature of shares; they’re risky.

Indeed, it looks as if the reliability of dividends is mistakenly baked into share prices. The cash that would have gone out of HSBC Holdings Plc had it not suspended its dividend is still inside the company and may flow to shareholders in better times. When it cut the payout, its shares still fell 10% in shock at what it had done.

Companies shouldn’t use the crisis as cover for a dividend cut that isn’t necessary. That would take the pressure off running a tight ship, and could encourage profligate investment. Dividends exist to distribute cash for which the company has no better purpose. There should be no stigma in paying out where it really can be afforded.

But a board’s duty is to the overall interest of the company, not to one portion of its shareholder base. And there’s no point in dividends being flexible if that flexibility isn't used in a crisis like this one.

This article was provided by Bloomberg News.