We estimate that dividends for S&P 500 companies will rise by over 10% this year. If we are right, it will be the first year since 2007 that dividends for the S&P will have risen on a year over year basis. Indeed, dividends have taken a beating over the last two years, and there are those who say that dividend investing is dead. You won't be surprised if we don't see it that way. Our analysis of the dividend cuts for 2008 and 2009 reveals that the preponderance of the cuts were in the financial sector. Additionally, over the last three years, six of the nine major S&P industry sectors have raised their dividends (Consumer Cyclicals, Consumer Staples, Energy, Health-care,Tech, and Utilities), one sector kept dividends about the same (Industrials), and only two sectors cut dividends Financials and Materials). Here are five reasons that we believe dividends will rise in the coming year:
- Corporate earnings are projected to grow by nearly 25%, with free cash flow growing even faster.
- Loan loss reserves are peaking at many banks, and we are convinced that banks will begin hiking dividends as soon as the regulators allow it.
- Corporations don't need to hoard cash since the capital markets have returned to near normal functioning.
- Even among companies that don't want to commit to permanent dividend hikes, we believe many will choose to pay special one-time dividends as a reward to their shareholders.
- In our judgment, corporate America is growing very weary of the run and gun stock trading crowd. Companies are becoming more and more anxious to attract shareholders who are interested in the long-term success of the company. The quarter-to-quarter trading crowd can never be successfully sold on the idea of investing in companies as opposed to stocks.
We'll report periodically in future blogs on how dividend growth is faring.
4 comments:
A: We just completed removing most of the "life support" from the capital markets last week. Let's not be so hasty with our triumph dance.
B: Corporations have worked nearly a decade to be the healthiest thing on the streets. They are not going to be so quick to relinquish their beloved cash until they know the best use for it. If some sectors go through consolidation, that cash may best be used for purchases. If you are an executive thinking further ahead than 2010 (which is commendable), then you are probably feeling quite protective of your cash hoard.
C: Financials are still posing as healthy. Healthy financials would start loosening their purse strings on lending before they raise a dividend. They aren't, so I predict they won't ...
Dividends will rise, I just don't think it is going to happen as quickly as you predict. There are too many doubters in the executive ranks to want to flow that excess cash to shareholders too quickly...
Dividends will definitely be strong going forward. Leaving aside the financials, it is important to consider that many companies continued to generate huge sums of cash during the last 2years even as they slowed down their dividend growth. Many companies will be loathe to use this excess cash for purposes other than rewarding shareholders through buybacks and dividends. They will be less likely to spend on big acquisitions in a slower growth economy where the lack of growth makes acquisitions less acreative to earnings. Buybacks and dividend increases tend to increase share prices while acquisitions generally tend to depress them.
For many companies, a big dividend increase will simply be playing catching up after spending the last two years bolstering the balance sheet. PEP's recent announcements in this regard are a good example. CL's 20% dividend increase a short while back may become more common for companies seeking to return to their normal payout ratios.
Cash for corporations is largely up do to cuts in capex spending and lower working capital requirements. Is this sustainable? Many CFOs are also hoarding cash given the uncertainty surrounding taxes, interest rates, commodity prices, and associated health care costs going forward, particularly given lack of optimal pricing power.
I do agree that a number of strong multi-national companies will continue to increase dividends (I own MCD and MO solely for their div growth trends) and we may see some one-time dividends going forward. I disagree wholeheartedly about the financials - FASB could wipe out the notion that are are strong enough to pay dividends in a few months.
The bigger question is tax treatment towards dividends going forward and the subsequent impact on how companies view that as a reward for their shareholders? Will a lower effective after-tax dividend payment be a better use of cash than normal reinvestment?
Interesting times. Hope all is well in IN. Dave G
While I don't think companies will purchase willy nilly, it is clear that some companies are prepared acquire companies in order to improve earnings by gobbling up inefficient competitors and stripping out expenses. I think if you check the headlines in the last six months, you will see an increase in acquisition activity.
I also agree with the second anonymous comment in that cash on the sideline is the byproduct of top line cost cutting that, should the recovery be sustained, will go away as corporations ramp up... I think the "recovery" is will last only as long as the starting fluid is in the carburetor (for those who remember what one is...) The problem is further down the line and the artificial stimulus isn't enough to "prime" the fuel line...
All the best...
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