Thursday, January 24, 2008
I believe that dividend increases are good for many reasons, not the least of which, it means I'm getting a "raise." But there is another important message that dividend increases offer and that is what academia calls, "signalling." Signaling is the idea that since a dividend hike, unlike earnings, is a voluntary action by the board of directors, and since the board can pay any amount of dividends they wish, or none at all, that this unencumbered action has meaning as much about the future as the past . Thus, dividend actions take on great importance during crises. The reason is obvious -- if a business is suffering, it might want to keep the capital (real money) instead of paying out to shareholders in the form of dividends. I believe three recent dividend hikes by major companies give us good clues about business prospects in three important areas of the economy. GE recently raised their dividend by 10.7%. That is in line with their average annual increase of the past 5 years. If there is a signal in GE's dividend hike, and I firmly believe there is, it is that their business is growing at a reasonably steady pace. Their international business is carrying the load and will continue to do so. Probably a bigger signal is that GE Credit does not likely have a big closet full of risk that might end up in the headlines. I thought the GE hike was slightly better than I would have expected, therefore, I think it is good news for them and the global economy. Boeing (BA). Lately BA has been flying like a company with two left wings. Rumor has it, the Dreamliner may be renamed to the "Maybe Later Liner." Not a catchy name, and not likely to catch many more orders until they can prove that their tower of babel production strategy will work. Having said this, BA recently raised their dividend 14.3%, a solid showing and a signal that they are confident that better times are coming. US Bancorp (USB): In the middle of the recent melt down, with investors beating all the banks with an ugly stick, USB raised their dividend 6.2%. That is less than half of their average hike of the last 5 years, but, in light of all the unknowns about the economy and the credit crisis, I was pleased with the increase. Here's the reason: A constant 6% growth rate would double USB's current dividend of $1.70 in 12 years. Based on today's price of $33.50, that would mean that in 12 years I would be making about 11% on my original investment. Now that may not make our friends in the private equity crowd get excited, but it's plenty good for me, especially when you consider that a ten-year US T-Bond yields just over 3.5%. Dividends talk. Most of them have a pretty straightforward message. Some dividend hikes, however, are purely to "buy" shareholders. Those are the ones you have to watch out for. The three companies above have made generous dividend hikes in a very worrisome time. That tells me that they are confident about their businesses in the coming year. That's a nice bit of good news to go along with the flood of gloom and doom that we have to contend with everyday. We own the above three stocks and have for a long time. This discussion is for information purposes only.