The stock market staged a broad advance in heavy trading Monday, as investors focused on issues related to takeovers and pending dividend payouts.
Also bolstering the market was the dollar's relative stability against other currencies and last week's bond market rally, which sent interest rates lower, making stocks more attractive, analysts said. Bond prices remained little changed.
At the close, the Dow Jones index of 30 industrial stocks stood at 1,946.45, up 42.94 from Friday, when the closely watched indicator picked up 24.20.
It was the second-biggest gain since a 76.42-point increase Jan. 4.
Advancing issues outpaced decliners by about 11 to 4 among New York Stock Exchange-listed issues, with 1,137 higher, 436 lower and 396 unchanged.
Big Board volume totaled a hefty 275.25 million shares, making it the 11th-busiest day in history, surpassing the 268.91 million shares traded on Nov. 30 last year.
Of Monday's total volume, about 42%, or about 112.34 million shares, consisted of shares in five companies due to pay dividends soon.
They were: Southern Co., up at 24--the Big Board's most active issue with about 66 million shares changing hands; Pinnacle West Capital, up 3/8 at 29 5/8; Cincinnati Gas & Electric, up at 21 5/8; Chase Manhattan Bank Corp, up 1/8 at 21 5/8, and Eastern Utilities Associates, up 3/8 at 29.
Japanese traders were heavy buyers of dividend-related stocks, because their tax laws make it worthwhile for them to buy the issues for the dividends, even if they sell them at a loss soon afterward, said Edward P. Nicoski, a technical analyst at Piper Jaffray & Hopwood Inc.
Another factor that aided the market's rise was its predisposition to move up before a State of the Union message, said Alfred Goldman, portfolio strategist at A. G. Edwards. President Reagan was to deliver his State of the Union address Monday night.
"The market tends to rally going into the State of the Union message, but the next day it's back to reality," Goldman said. "Enjoy the wedding," he quipped, "because tomorrow's the wake."
Oppenheimer & Co. analyst Michael Metz said investors in general were also "putting more emphasis on total return," looking for both capital gains as well as good dividend payouts. "In that regard, utilities will certainly outperform the rest of the market," he said.
But the real driving force of Monday's market was "the takeover game," Metz added.
On Monday, Federated Department Stores soared 13 1/8 to 49 per share, after Canadian developer Campeau Corp. bid $4.2 billion for the company. New York developer Donald Trump was also rumored to be interested in Federated.
Eastman Kodak, however, lost 4 to close at 44 7/8, while Sterling Drug, jumped 9 to 87 3/4, following Kodak's $89.50-per-share bid for Sterling last week.
Other drug firms also posted gains, cited by traders as possible new targets by Hoffmann-La Roche, which lost Sterling to Kodak. Merck was up 3 1/8 at 153 1/8, Pfizer climbed 1 to 52 3/8 and Eli Lilly was up 1 at 77 3/4.
Among other takeover stocks, Computervision closed unchanged at 14 3/4 in the wake of Prime Computer's bid of $15 a share. Prime was also unchanged at 14 7/8.
Several analysts said stocks were also helped by last week's bond market rally, which sent bond prices higher and interest rates lower, making stocks more attractive. In addition, they said, the market was encouraged that the dollar held steady against other world currencies.
In foreign trading, shares on the London Stock Exchange recovered slightly at the close Monday but still finished lower in quiet trading. The Financial Times 100-share index was down 8.7 to 1,762.2 at the close, after having been off 13.6 at mid-afternoon.
In Tokyo, stocks ended moderately higher, with the Nikkei 225-share index rising 193.07 to close at 23,318.40.