Companies Ease Up on Dividend Increases

Fewer U.S. companies raised cash dividend payments in March than a year earlier, a turnabout that may reflect fading hopes for President Bush’s plan to make dividends tax exempt.

The decline in dividend increases ended a four-month streak that saw more companies boosting their cash payouts to shareholders compared with the previous year.

In January, when Bush surprised Wall Street with his tax-break proposal, 197 companies announced higher dividends, the largest number since February 2000. Some firms said the tax exemption idea encouraged them to raise their payments, and many Wall Street pros said the Bush plan could give investors a major new reason to buy stocks, which could lift share prices.

But the Senate last month cut the president’s 10-year, $726-billion tax-cut plan in half. That appeared to doom the plan’s centerpiece of a full tax exemption for dividend income.

In March overall, 103 companies hiked dividend payments, down from 110 a year earlier, according to Standard & Poor’s, which tracks dividend data.

Joseph Lisanti, editor of S&P;’s Outlook investment newsletter in New York, said the falloff in dividend increases could be blamed in part on corporate managers’ growing caution about their businesses in light of war worries. Typically, managers want to feel confident about rising earnings before they commit to sharing more of their profit directly with stockholders via dividends, he said.

But the dashed hopes for the Bush tax-break proposal also reduced some managers’ incentive to raise dividend payments, Lisanti said.

“I think that’s absolutely the case,” said George Mairs, a principal at money management firm Mairs & Power Inc. in St. Paul, Minn., and a longtime proponent of dividend income.

Without a tax exemption for dividends, any shift toward larger payouts “will develop much more slowly than I would have hoped,” Mairs said.

Many companies began to de-emphasize dividends in the 1990s, saying that taxation of those payments as ordinary income made them unappealing to most shareholders. Instead, more firms used cash to buy back stock in an attempt to boost their share prices -- because capital gains are taxed at lower rates than dividends.

But even before the Bush tax-break idea was floated, some investors had been pushing companies to pay out more of their earnings in dividends. One argument was that higher dividends would impose more discipline on corporate managers, reducing the potential for them to misuse profit by making ill-conceived acquisitions, for example.

After declining from 1997 to 2001, the number of companies raising dividends began to rebound last summer as corporate earnings improved, S&P; data show.

This year, two large technology firms that had long shunned the idea of dividends -- Microsoft Corp. and Qualcomm Inc. -- announced their first cash payouts. Some analysts cheered the switch, saying that the long bear market would make more investors appreciate earning quarterly hard-cash income from stocks as opposed to relying solely on the chance of a rising share price.

“But if Congress kills the dividend initiative, we’re going to reward the behavior we always have, which is to forget dividends,” said Robert Bissell, chief investment officer at Wells Capital Management in Los Angeles.

Mairs said he held out hope that Congress would go along with some kind of tax break for dividends, even if a full exemption isn’t possible.

Without a tax cut, some shareholders still may continue to push for bigger dividends, especially if stocks slump anew, analysts say.

Ameron International Corp., a Pasadena-based maker of industrial products, last week said it would raise its quarterly dividend 25%, to 40 cents a share.

Gary Wagner, Ameron’s chief financial officer, said the firm primarily was motivated by confidence in its earnings outlook. But he said recent requests by individual shareholders for a bigger dividend also were a factor in the decision.