Cash-rich firms skimp on dividends
Investors in Mattel Inc., McDonald’s Corp. and Home Depot Inc. got hefty cash bonuses this year for being shareholders. All three raised their dividend payments 30% or more.
But corporate generosity with dividends overall didn’t live up to some analysts’ expectations.
That is stoking concern about the outlook for payouts in 2007 and beyond -- at a time when the growing ranks of retirees may have more need for rising income from their stock investments.
“We thought companies would do more” with dividends this year, given that corporate earnings surged, said Howard Silverblatt, a senior analyst at data firm Standard & Poor’s in New York.
Within the blue-chip S&P; 500 index, the number of companies raising or initiating dividends totaled 304 this year, down from 317 in 2005. That breaks a strong uptrend in place since 2003, when 267 of the companies in the index lifted or initiated payouts.
Dividends had been on the rise in recent years as corporate earnings boomed amid a global economic expansion. Dividend payments typically improve with companies’ fortunes.
Corporations have had another incentive to lift their cash payouts to investors: Congress in 2003 slashed the top federal tax rate on dividend income to 15% from 38.6%, making dividends much more lucrative for shareholders than before.
The decline in the number of blue-chip dividend increases this year may stem in part from corporate fears of a weaker economy slowing earnings growth in 2007.
Companies often hesitate to commit to bigger dividends when they expect their earnings growth to decelerate, because dividends generally are paid out of retained profit.
But something else is holding back dividend increases, many analysts say. Instead of handing out more cash to shareholders, many companies are spending record sums to buy back stock.
In theory, buybacks can help push up stock prices, rewarding shareholders with capital gains. And by reducing the number of shares outstanding a company can boost its earnings per share, potentially making its stock more valuable.
Still, those are just possible effects -- whereas a dividend payment is hard cash in investors’ pockets.
S&P; 500 companies shelled out $110 billion for stock buybacks in the third quarter, twice what they paid in dividends, S&P; data show.
Cash dedicated to buybacks has mushroomed since 2004, while total dividends have grown much more slowly.
“We are concerned that the large expenditures on buybacks may be inhibiting dividend growth,” Silverblatt said.
He noted that companies can suspend buyback programs at any time. Dividends, by contrast, tend to represent a long-term commitment from a company to its shareholders. Most firms are loath to cut their payouts because of the negative message that can send to investors who have become used to the income.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, generally prefers dividends to buybacks.
It makes sense for a company to use cash to buy back its stock, he said, if the shares are trading for less than the company’s net worth, or book value -- meaning assets minus liabilities. But today, with the S&P; 500 index near a six-year high, “very few stocks are trading below book value,” Ablin said.
He also believes that executives favor buybacks on the hope that the purchases will temporarily lift the share price, in turn boosting the value of any stock options they may want to cash in.
Many major companies are spending money on both buybacks and higher dividends. Fast-food giant Yum Brands Inc., which owns Taco Bell, KFC and other chains, this month doubled its quarterly dividend to 30 cents a share. It also spent $337 million to buy back stock in the third quarter.
Ablin, who holds Yum Brands in Harris’ portfolio, said he was happy with the company’s dividend and buyback programs. But with corporate coffers brimming with cash, other companies could be more generous, he said.
“It’s maddeningly frustrating to me that corporations are hoarding cash and sitting there,” he said.
Computer networking giant Cisco Systems Inc. pays no dividend, even though the San Jose-based company has $19.5 billion in cash and securities on its balance sheet.
Cisco believes that its stock buyback program, “combined with ongoing strategic investments in our business and maintaining a strong cash balance, are in the best interest of our shareholders,” according to a statement on the company’s website.
Some companies have been much more eager to share profit with investors via dividends.
El Segundo-based toy maker Mattel raised its annual dividend 30% on Nov. 17, from 50 cents a share to 65 cents. Chief Executive Robert A. Eckert said the move “demonstrated [Mattel’s] commitment to returning excess funds to shareholders.”
McDonald’s, under pressure by activist investors to improve returns, boosted its annual dividend 49% in September, from 67 cents a share to $1.
In November, Home Depot lifted its quarterly payout by 50% for the second time this year, bringing it to 22.5 cents a share.
Some Wall Street pros believe that retiring baby boomers, seeking income growth that fixed-rate bonds or bank accounts can’t provide, increasingly will turn to stocks of firms that raise dividends at least once a year.
The tax change in 2003 left dividends and long-term capital gains taxed at the same rate. Before then, capital gains usually had a tax advantage.
Pension funds also may have to rely more on rising dividends to meet their obligations, particularly if bond yields stay relatively low, analysts say.
“What gets us excited about dividends is that we think we’re entering an environment when they will be valued more” by investors, said Doug Sandler, chief equity strategist at Wachovia Securities in Richmond, Va.
That could mean higher prices over time, he said, for dependable-dividend shares than for companies that have similar growth prospects but aren’t as forthcoming with cash payouts.
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More cash to shareholders
Here are some of the companies that raised their dividend payments by double-digit rates or better in the second half of 2006. Also shown are the stocks’ dividend yields -- the annual dividend divided by the current stock price.
*--* Annual div. Pctg. Stock Div. per share Company Previous New rise price yld. Yum Brands $0.60 $1.20 +100% $59.10 2.0% Home Depot 0.60 0.90 +50 39.73 2.3 D.R. Horton 0.40 0.60 +50 26.60 2.3 McDonald’s 0.67 1.00 +49 44.36 2.3 Aflac 0.52 0.74 +42 45.96 1.6 Mattel 0.50 0.65 +30 22.58 2.9 Rockwell 0.90 1.16 +29 61.98 1.9 Automation Hartford 1.60 2.00 +25 93.61 2.1 Financial Boeing 1.20 1.40 +17 89.00 1.6 Bank of America 2.00 2.24 +12 53.65 4.2
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Sources: Standard & Poor’s, Times research
