Wednesday, July 06, 2005

Summer Stroll #12 -- Under the Sun

To everything there is a season, and a time to every purpose under heaven. Ecc. 3:1-8 I think I must have read the Old Testament book of Ecclesiastees a dozen times before I began to understand why it was included in the Bible. I will not go into its deeper meanings here, only to say the teacher who wrote this book foresaw that there really wasn't much new under the sun. It has all come before; it will all come again. Here's my point. Over the next decade, I believe the dividend payout ratio for the Dow Jones 30 Industrials and other major large-cap indices will return to their 80 year averages of 50%. That may not make you want to turn cartwheels in the office, but it is a very big deal. In almost every decade since the 1920s the companies in the Dow Jones Industrial Average have paid out approximately 50% of there earnings in dividends. For whatever reason, beginning in the 1990s the payout ratio began to trend down and it reached as low as 30%. It now stands at about 33%. Over the next 10 years, I believe it will move back to its historical norms. Wall Street is estimating that earnings will grow at about 7% per year over the next 3-5 years. If that is the case, I believe dividends will grow at 9%. At this 2% premium growth of dividends above earnings it will take about 8 years to return to a 50% payout for the overall DJ 30. The reason is simple. Profits are growing nicely, cash flow is growing even better, and costs are under control. Capital expenditures will be weighed very carefully vs outsourcing. Companies must turn the tide of negative press, and clean up legal issues to regain the trust of the American investor. Talk won't do it. Good intentions won't do it. Cash will do it, and the season is right. Little by little investors will discover that dividends are real money and they will, in time, flock to companies that are increasing their dividends. A time to tear down, a time to build up.[Order of verses reversed]