Dip in dividends trend reflects 2007 concerns
By Tom Petruno
Los Angeles Times
Investors in Mattel Inc., McDonald’s Corp. and Home Depot Inc. got hefty cash bonuses this year. All three raised their dividend payments 30 percent or more.
But corporate generosity with dividends overall didn’t live up to some analysts’ expectations.
That is stoking concern about the outlook for payouts in 2007 and beyond at a time when the growing ranks of retirees might have more need for rising income from their stock investments.
“We thought companies would do more” with dividends this year, given corporate earnings’ surge to record highs, said Howard Silverblatt, a senior analyst at data firm Standard & Poor’s in New York.
Yet within the blue-chip S&P 500 index, the number of companies raising or initiating dividends totaled 304 this year, down from 317 in 2005. That breaks a strong uptrend in place since 2003, when 267 of the companies in the index lifted or initiated payouts.
Dividends had been rising in recent years as corporate earnings boomed amid a global economic expansion. Dividend payments typically improve with companies’ fortunes.
Corporations have had another incentive to lift their cash payouts to investors. Congress in 2003 slashed the top federal tax rate on dividend income to 15 percent from 35 percent, making dividends much more lucrative for many shareholders.
The decline in the number of blue-chip dividend increases this year might stem in part from corporate fears of slower earnings growth in 2007 and a weaker economy.
Companies often hesitate to commit to bigger dividends when they expect their earnings growth to decelerate, because dividends generally are paid out of retained profit.
But something else is holding back dividend increases, analysts say. Instead of paying more cash directly to shareholders, many companies are spending record sums to buy back stock.
In theory, buybacks can help push up stock prices, rewarding shareholders with capital gains. And by reducing the number of shares outstanding a company can boost its earnings per share, potentially making its stock more valuable.
Still, those are just possible effects — whereas a dividend payment is cash in investors’ pockets.
S&P 500 companies shelled out $110 billion for stock buybacks in the third quarter, twice what they paid in dividends, S&P data show.
“We are concerned that the large expenditures on buybacks may be inhibiting dividend growth,” Silverblatt said.
He noted that companies can suspend buyback programs at any time. Dividends, by contrast, tend to represent a long-term commitment from a company to its shareholders; most firms are loath to cut payouts because of the negative message that would send investors who have gotten used to the income.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said he generally prefers dividends to buybacks. It makes sense for a company to use cash to buy back its stock, he said, if the shares are trading for less than the company’s net worth, or book value — meaning assets minus liabilities. But with the S&P 500 index near a six-year high, “very few stocks are trading below book value,” Ablin said.
Many major companies are spending money on buybacks and higher dividends. Yum Brands Inc., which owns Taco Bell, KFC and other chains, this month doubled its quarterly dividend to 30 cents a share. It also spent $337 million to buy back stock in the third quarter.
Ablin, who holds Yum Brands in Harris’ portfolio, said he’s happy with the company’s dividend and buyback programs. But with corporate coffers brimming with cash, he said other companies could be more generous.
“It’s maddeningly frustrating to me that corporations are hoarding cash and sitting there,” he said.
Computer networking giant Cisco Systems Inc. pays no dividend — even though the company has a record $19.5 billion in cash and securities on its balance sheet.
Cisco says it believes that its stock buyback program, “combined with ongoing strategic investments in our business and maintaining a strong cash balance, are in the best interest of our shareholders,” according to a statement on the company’s Web site.
Toy maker Mattel raised its annual dividend payout 30 percent Nov. 17, from 50 cents a share to 65 cents. Chief Executive Robert A. Eckert said the move “demonstrated (Mattel’s) commitment to returning excess funds to shareholders.”
McDonald’s, under pressure to improve returns for shareholders, boosted its annual dividend 49 percent in September, from 67 cents a share to $1. And Home Depot lifted its quarterly payout by 50 percent in November, to 22.5 cents a share, the second such percentage increase this year.
Some Wall Street pros believe that retiring baby boomers increasingly will turn to stocks of companies that raise dividends at least once a year, as a way to get income growth that fixed-rate bonds or bank accounts can’t provide.
Pension funds also might have to rely more on rising dividends to meet their obligations, particularly if bond yields stay relatively low, analysts say.
“What gets us excited about dividends is that we think we’re entering an environment when they will be valued more” by investors, said Doug Sandler, chief equity strategist at brokerage Wachovia Securities in Richmond, Va.
That could mean higher prices, over time, for dependable-dividend shares than for companies that have similar growth prospects but aren’t as forthcoming with cash payouts, he said.
Dip in dividends trend reflects 2007 concerns
By Tom Petruno
Los Angeles Times
Investors in Mattel Inc., McDonald’s Corp. and Home Depot Inc. got hefty cash bonuses this year. All three raised their dividend payments 30 percent or more.
But corporate generosity with dividends overall didn’t live up to some analysts’ expectations.
That is stoking concern about the outlook for payouts in 2007 and beyond at a time when the growing ranks of retirees might have more need for rising income from their stock investments.
“We thought companies would do more” with dividends this year, given corporate earnings’ surge to record highs, said Howard Silverblatt, a senior analyst at data firm Standard & Poor’s in New York.
Yet within the blue-chip S&P 500 index, the number of companies raising or initiating dividends totaled 304 this year, down from 317 in 2005. That breaks a strong uptrend in place since 2003, when 267 of the companies in the index lifted or initiated payouts.
Dividends had been rising in recent years as corporate earnings boomed amid a global economic expansion. Dividend payments typically improve with companies’ fortunes.
Corporations have had another incentive to lift their cash payouts to investors. Congress in 2003 slashed the top federal tax rate on dividend income to 15 percent from 35 percent, making dividends much more lucrative for many shareholders.
The decline in the number of blue-chip dividend increases this year might stem in part from corporate fears of slower earnings growth in 2007 and a weaker economy.
Companies often hesitate to commit to bigger dividends when they expect their earnings growth to decelerate, because dividends generally are paid out of retained profit.
But something else is holding back dividend increases, analysts say. Instead of paying more cash directly to shareholders, many companies are spending record sums to buy back stock.
In theory, buybacks can help push up stock prices, rewarding shareholders with capital gains. And by reducing the number of shares outstanding a company can boost its earnings per share, potentially making its stock more valuable.
Still, those are just possible effects — whereas a dividend payment is cash in investors’ pockets.
S&P 500 companies shelled out $110 billion for stock buybacks in the third quarter, twice what they paid in dividends, S&P data show.
“We are concerned that the large expenditures on buybacks may be inhibiting dividend growth,” Silverblatt said.
He noted that companies can suspend buyback programs at any time. Dividends, by contrast, tend to represent a long-term commitment from a company to its shareholders; most firms are loath to cut payouts because of the negative message that would send investors who have gotten used to the income.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said he generally prefers dividends to buybacks. It makes sense for a company to use cash to buy back its stock, he said, if the shares are trading for less than the company’s net worth, or book value — meaning assets minus liabilities. But with the S&P 500 index near a six-year high, “very few stocks are trading below book value,” Ablin said.
Many major companies are spending money on buybacks and higher dividends. Yum Brands Inc., which owns Taco Bell, KFC and other chains, this month doubled its quarterly dividend to 30 cents a share. It also spent $337 million to buy back stock in the third quarter.
Ablin, who holds Yum Brands in Harris’ portfolio, said he’s happy with the company’s dividend and buyback programs. But with corporate coffers brimming with cash, he said other companies could be more generous.
“It’s maddeningly frustrating to me that corporations are hoarding cash and sitting there,” he said.
Computer networking giant Cisco Systems Inc. pays no dividend — even though the company has a record $19.5 billion in cash and securities on its balance sheet.
Cisco says it believes that its stock buyback program, “combined with ongoing strategic investments in our business and maintaining a strong cash balance, are in the best interest of our shareholders,” according to a statement on the company’s Web site.
Toy maker Mattel raised its annual dividend payout 30 percent Nov. 17, from 50 cents a share to 65 cents. Chief Executive Robert A. Eckert said the move “demonstrated (Mattel’s) commitment to returning excess funds to shareholders.”
McDonald’s, under pressure to improve returns for shareholders, boosted its annual dividend 49 percent in September, from 67 cents a share to $1. And Home Depot lifted its quarterly payout by 50 percent in November, to 22.5 cents a share, the second such percentage increase this year.
Some Wall Street pros believe that retiring baby boomers increasingly will turn to stocks of companies that raise dividends at least once a year, as a way to get income growth that fixed-rate bonds or bank accounts can’t provide.
Pension funds also might have to rely more on rising dividends to meet their obligations, particularly if bond yields stay relatively low, analysts say.
“What gets us excited about dividends is that we think we’re entering an environment when they will be valued more” by investors, said Doug Sandler, chief equity strategist at brokerage Wachovia Securities in Richmond, Va.
That could mean higher prices, over time, for dependable-dividend shares than for companies that have similar growth prospects but aren’t as forthcoming with cash payouts, he said.