Steep Decline Seen in the Number of Dividend Increases

Wall Street has in recent weeks grown increasingly worried about the health of corporate profits. One key indicator suggests that many corporate boards share that concern.

A total of 73 U.S. companies raised their cash dividend payments to shareholders in September, the fewest number of increases for any September since 1991, Standard & Poor’s Corp. said Tuesday.

The total for the month was down 38% from September 1999. In the third quarter overall, the number of dividend increases totaled 266, down 16% from the same period last year.

Cash dividends are paid out of companies’ profits. Thus, corporate directors and managers may be less willing to raise dividend payments if they are concerned that profit growth will slow.

Dividend generosity has been on the wane for several years, however, even in times of strong earnings growth.

Many companies have opted to slow the pace of dividend increases, or forgo increases altogether, in favor of other uses for their cash.

Indeed, institutional investors often have encouraged companies to use their cash flow to buy back shares in the open market rather than increase dividends.

Buyback programs can boost a company’s stock price and thus produce larger capital gains for shareholders. Long-term capital gains qualify for lower tax rates, while dividend payments are fully taxable.

But the decline in the number of dividend increases announced in September, compared with a year earlier, was particularly steep. It coincided with a larger-than-usual number of companies warning that their third-quarter earnings wouldn’t meet expectations.

Arnold Kaufman, editor of Standard & Poor’s Outlook investment newsletter in New York, said many companies still have the ability to raise dividends, but increasingly want the “flexibility” afforded them by keeping payouts relatively modest.

And so far, Kaufman said, most shareholders aren’t putting pressure on companies to boost their dividends. Whether that will change if stock prices continue to slide remains to be seen.

A positive note, Kaufman said, is that the number of dividend cuts is running below the level of 1999.

The number of companies cutting their dividends or omitting dividends entirely totals 93 so far this year, down from 116 in the same period of 1999.

Kaufman said many companies remain fearful of the stigma attached to dividend cuts or omissions. Such actions usually suggest a company has fallen on very hard times.

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Corporate Tightwads?

A total of 266 U.S. companies raised cash dividend payments to shareholders in the third quarter, down sharply from the third quarter of 1999--continuing the trend of recent years of declining dividend generosity.

Source: Standard & Poor’s Corp.