Sunday, March 02, 2008

Dividends Are Not Signalling Recession

If the US economy is falling into recession, you could not discern it from the dividend actions of major US companies over the last two weeks. As you know, one of our theories on dividends is that since dividends are decided by a company's board of directors, they speak as much about the future as the past . This is because no board wants to set a dividend policy that will lead to a cut in the dividend in the future. If our theory is correct, business is not as bad as the headlines would have us believe. According to the chart at the right, dividend growth remains strong. (Click to enlarge)

Over the last two weeks 19 major companies raised their dividend. No major company lowered its dividend. The table above shows some very strong and surprising dividend hikes. I have highlighted 5 in green in column 7. Abbott Labs hiked their dividend nearly 11%. This is much higher than their 3-5 year trend shown in column 6. Abbott has taken the lead among health care stocks in assembling the right mix of products.

Coke raised its dividend nearly 12%, another sign that the world leader in soft drinks continues to regain in once dominant position in the industry.

Colgate. CL is one of our favorite stocks, and we were pleased to see their 11% dividend hike. While this is slightly lower than their average of recent years, we believe it signals good things for this important consmer staple in the year ahead.

ITT, an industrial company, raised their dividend nearly 25%. This is well above their recent trend, and another sign that the industrial sector is still growing at a solid rate through their international sales.

Nordstrom's double-digit hike was impressive coming from a company in the retail industry, which most people believe is headed for trouble. Nordstroms must be of the mind "that this too shall pass."

Toronto Dominion put most US banks to shame by hiking their dividend over 11%. Minimal subprime exposure and a strong Canadian economy are obviously the drivers of TD's impressive dividend hike.

Since we began tracking this dividend data (near the first of the year), dividend growth has averaged approximately 12.4%, only slightly less than the average of the last 3-5 years, and as shown at the bottom of the table, approximately 60% of the companies have made dividend hikes that were higher than their 3-5 year averages.

It is difficult to be too pessimistic about company profits for 2008, when dividend hikes continue to be so strong. I realize something has to give sooner or later -- dividend growth cannot continue to be strong should a deep recession occur in 2008. Having said this, the people who run these corportations are reading all the same newspapers you are, and they are saying by their actions that their businesses are still in a growth trend.

Clients and employees of DCM own ABT, KO, CL, and WRI.