Pressure is building for higher dividends as U.S. companies from Google Inc. (GOOG) to Valero Energy Corp. (VLO) sit on record cash stockpiles and payouts remain at three- year lows.
Standard & Poor's 500 Index companies paid 27 percent of earnings in dividends in the second quarter, down from 30 percent in 2008 and below a 30-year average of 41 percent, according to Wells Fargo & Co. Company cash, equivalents and short-term marketable securities jumped 63 percent to $2.77 trillion in the same period, according to Bloomberg data.
“Companies are hoarding a lot of cash and they're getting a very low return for it,” said Richard Sichel, chief investment officer at Philadelphia Trust Co., which manages $1.6 billion. “That's all the more reason for them to pay bigger dividends.”
Investors gave dividends less importance while stocks soared during the middle of the last decade, said Gina Martin Adams, a Wells Fargo equity strategist in New York. Now investors want companies to pay out more of the cash they are holding to make up for low equity returns in the past year, said Keith Wirtz, who helps manage $16.7 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati.
The S&P 500's ratio of net debt to earnings before interest, taxes, depreciation and amortization has dropped to 2.6 from 5 in mid-2008, data compiled by Bloomberg show. Analysts surveyed by Bloomberg project this year's earnings will increase 18 percent to about $100 a share.
Total Return
“Why are they sitting on all this cash, earning close to zero, when they could at least be putting it in the hands of shareholders?” said Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust Co. in Boston.
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Companies are harboring cash because the economic and political outlook remains cloudy, said David Sowerby, a fund manager with Bloomfield Hills, Michigan-based Loomis Sayles & Co., which manages $150 billion. Before dividends are increased, Sowerby said he wants more share buybacks from companies that see their stock as cheap.
The cash also would come in handy for acquisitions in markets with slow organic growth, said Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which manages $3.4 billion. Companies would have to use cash instead of shares because of depressed equity values, he said.
“We're going to be faced for some time with a slow environment for organic-type growth,” he said.
General Electric
General Electric Co. (GE), CBS Corp. (CBS) and Citigroup Inc. (C) were among companies that cut dividends during the recession as global financial-industry losses and writedowns from the credit crisis surpassed $1 trillion in December 2008. Shareholder payouts haven't been brought back to pre-recession levels.
GE in 2009 lowered its quarterly dividend for the first time since 1938 to 10 cents a share from 31 cents. The world's biggest provider of power-generation equipment and services has increased the payment three times since to 15 cents and Chief Executive Officer Jeffrey Immelt has told investors that raising the dividend and accelerating share repurchases will be priorities over large acquisitions in the “near term.”
Cash and short-term investments at Fairfield, Connecticut- based GE rose to $136 billion at the end of the second quarter, from $89 billion in the first quarter of 2009.
CBS, Valero
CBS, owner of the most-watched U.S. television network, trimmed its dividend 81 percent in 2009 to 5 cents from 27 cents. The New York-based broadcaster bought back stock and lifted the payout this year to 10 cents after trimming debt and as profit margins improved. Cash and near cash items have risen to $1.3 billion in the latest reported quarter from $239 million at the beginning of 2009.
Valero, the largest independent U.S. crude refiner, has more than doubled its cash holdings since 2009 to $4.1 billion. The San Antonio-based company cut its 15 cents dividend in 2010 to 5 cents, where it remains today.
“Distribution of dividends and other forms of income streams will become even more important over the balance of this decade in contribution of total return,” Wirtz of Fifth Third said of companies in general. “That's very much on our mind.”
Companies are earning almost nothing by sitting on cash at a time when the stock market may be entering another lost decade similar to the 1970s, Fiduciary Trust's Mullaney said. They should be a “bit more generous with their payouts,” he said.
Attracting Investors
The S&P 500 has dropped 17 percent in the five years ended yesterday. In the 1970s, it gave an average annual return of 2.4 percent. The index has tumbled 11 percent this year, and is down 18 percent from a 52-week closing high on April 29.
With an outlook of low growth for stocks over the next few years, the time for higher dividends has arrived, said Barry James, president of James Investment Research Inc. in Xenia, Ohio, which manages $2.5 billion of securities. James favors companies like Indianapolis-based drugmaker Eli Lilly & Co. (LLY), which has a dividend yield of about 5.3 percent.
A more aggressive dividend policy would help attract investors, who are migrating to fixed income, back to equities, Mullaney said.
“That's one way companies can differentiate themselves as far as being better total-return prospects if they do pay up more in dividends during rough times,” he said.
Share Buybacks
The S&P 500's dividend yield had risen to 2.31 percent as of yesterday, the most since November 2009, according to data compiled by Bloomberg. The rate is higher than the yield on 10- year Treasuries, only the second period since the 1950s in which that was the case. Dividends topped U.S. government bonds in 2008 and 2009, after Lehman Brothers Holdings Inc.'s bankruptcy spurred the worst financial crisis since the Great Depression.
At least 60 companies in the S&P are likely to raise their dividends, including Wal-Mart Stores Inc. (WMT), Walt Disney Co. (DIS) and Nike Inc. (NKE), according to a Bloomberg analysis of seven criteria including company guidance, dividend history, regression analysis and put-call parity.
Some companies including CVS Caremark Corp. (CVS) and Intel Corp. have turned to share buybacks, giving each remaining share a bigger slice of earnings.
S&P 500 companies were paying out about 1.92 percent of their stock price in dividends at the end of the second quarter. When the value of share repurchases is added in, the stock yield jumped to 4.88 percent, according to data from S&P. That's up from 3.4 percent in the first quarter of 2010 and down from about 7.5 percent at the end of 2008.
Financial Companies
A lot of the dividend malaise can be blamed on financial companies, said Martin Adams of Wells Fargo. U.S. banks are holding cash as Europe grapples with the threat of sovereign debt defaults and as they await clues on changes in financial regulations, she said.
Citigroup, the U.S. bank that received the largest taxpayer-funded bailout, had a quarterly payout as high as $5.40 in 2007, trimming it in 2008 before discontinuation in 2009. The New York-based bank reinstated the dividend in June of this year at 1 cent a share, after a reverse split of common stock. The 1- cent quarterly payout produces an annualized dividend yield of about 0.08 percent, among the lowest of S&P 500 companies that pay a dividend, according to data compiled by Bloomberg.
JPMorgan Chase & Co. (JPM), which had the largest cash holdings among S&P 500 companies with $414 billion, raised its quarterly dividend to 25 cents a share this year from 5 cents. The payout is less than the 38 cents the New York-based bank paid at the beginning of 2009.
Technology Companies
Technology companies also have been hesitant to pay dividends because they're seen as a symbol of dwindling growth prospects, Martin Adams said. Google, which has increased its cash pile to $39 billion from $16 billion in 2008, and Apple Inc. (AAPL), which sits on $28 billion of cash, don't pay dividends.
Dell Inc. (DELL), which had the 13th-highest cash-to-assets ratio in the S&P 500 at midyear, also pays no dividend. The Round Rock, Texas-based company has about $1 of cash for every $3 of assets on its balance sheet, according to Bloomberg data. That's more than double the ratio of Caterpillar Inc. (CAT), which pays a dividend of 46 cents, and three times the ratio of Hewlett- Packard Co., which increased its dividend this year to 12 cents.
“Dividends are going to grow more and more important, and you'll see more companies paying them and more investors focused on them,” James said. “Ten years ago the dividend yield was an afterthought.”
Getting Louder
Microsoft Corp. (MSFT), the largest holder of cash among non- financial S&P 500 companies at the end of June with $52.8 billion, boosted its quarterly dividend 25 percent to 20 cents a share this year. Neil Herman, an analyst at Ticonderoga Securities LLC, had urged the Redmond, Washington-based software maker to double the dividend as a way to juice the share price.
Microsoft has a “balanced approach to allocating capital” that includes investment in its markets, acquisitions, share buybacks and dividends, Chief Financial Officer Peter Klein told analysts last month, according to the transcript of the meeting.
--Bloomberg News
