On 8 May 2009, Toyota Motor Company, the world’s largest automobile manufacturer, announced that it was going to cut its dividend for the first time. Toyota, which pays dividends twice a year, said the dividend would be reduced to ¥35 a share from the ¥75 paid a year earlier. The 2008 total dividend was ¥140 a share. The dividend cut ends a 600 percent cumulative increase in the dividend over 10 years. Faced with plunging global demand for cars (Toyota’s vehicle sales were forecasted to fall 14 percent) and ongoing turmoil in the auto industry, Toyota was expecting a loss as high as ¥550 billion (operating loss of ¥850 billion) for fiscal year ending March 2010, compared with the analyst forecast loss of ¥284 billion for the same period. The company already had a loss of ¥437 billion in fiscal year 2009 (the operating loss was ¥461 billion). Toyota is focused on aggressively cutting costs—it plans to cut production-related costs by ¥340 billion and fixed costs by ¥460 billion—and has said that the lower dividend is because of the difficulty of sustaining the dividend at its previous level. Board member bonuses have been eliminated and manager summer bonuses were reduced by 60 percent. Capital spending will be cut by 36 percent to ¥830 billion, and R&D spending will be cut by 9.3 percent to ¥820 billion.

The company announced plans to raise capital via a bond issue of as much as ¥700 billion. Standard & Poor’s cut Toyota’s bond rating from AA+ to AA. Another problem facing Toyota and other Japanese automakers is the strong yen, which has gained 13 percent against the U.S. dollar in the preceding quarter. Toyota said that a one yen gain against the dollar trims profits by about ¥30 billion and that a similar gain against the euro trims profits by ¥4 billion.

Discuss Toyota’s decision to cut its dividend in light of the factors affecting dividend policy covered in this section.