Saturday, October 01, 2005

Dividend Increases Talk

The fourth quarter is one of the heaviest times of the year for dividend increases. Many corporate boards will be announcing to shareholders what part of 2005 corporate profits they will be paying out in dividends. But it is important to remember that dividends are as much about the future as the past. No company wants to set a dividend rate that they will have to reduce should business turn soft. With Katrina and Rita having cut a whole in near term earnings and blurred prospects for 2006, I will be very curious to see what kind of dividend increases we get, particularly for the Dividend Stars. Dividend Stars, you will recall, are companies that have consistently raised dividends for many years, even when dividends were out of fashion. Also of interest will be the dividend hikes from the oil stocks. Earnings are way up, but dividend increases have not been anywhere close to earnings growth for Exxon and Chevron. Will they share the wealth, or will they keep buying back stock. Stock buybacks are fine, but did you ever ponder the fact that stock buy backs mostly favor people selling out. Gimme the cash, I'll reinvest it if its good enough. Finally, I will become concerned about forward earnings if we see a lot of the major dividend payers hike payments by 6%-7%. A hike of this magnitude is the long-term trend and is the same thing as a punt. Dividends talk, and I want some of the key dividend companies, like GE, United Technologies, MMM, Coke, and Pepsi to be hiking payments in the 10%-15% range. In my mind that would be signaling as much about the coming year as the one just past. I continue to believe that stocks are very cheap relative to bonds, maybe as much as 20% undervalued. With 2005 earnings now expected to rise 12%-13% versus expected growth of 7% at the beginning of the year, most companies have had a windfall year. Will they reward us with windfall dividend hikes or will they revert back to long-term trend hikes in the 6%-7% range? I will chronicle important dividend announcements on the site through the end of the year. I will provide a list of the lineup in a future blog.