Record earnings fueled by the highest profit margins since 1993 are giving executives more leeway than ever to boost dividends as the bull market enters its third year
Record earnings fueled by the highest profit margins since 1993 are giving executives more leeway than ever to boost dividends as the bull market enters its third year.
Margins will climb to 8.9% this year, the highest level in at least 18 years, according to data compiled by Bloomberg through March 11 on non-financial companies in the S&P 500. Greater profitability, combined with dividend cuts during the credit crisis, have pushed earnings to 6.53% of the gauge's price, or 3.5 times more than its payout rate, close to the record 3.6 multiple in January.
A total of 95 companies, led by Aetna Inc. Ticker:(AET) and Carnival Corp. Ticker:(CCL), have raised dividends as the fastest economic expansion in six years, including five straight quarters of earnings growth, has increased confidence among chief executives. Of the 380 that pay dividends, 378 are forecast to maintain or increase them, according to data compiled by Bloomberg using options prices, profits, management statements and peer comparisons.
“The economy seems to be doing well, and earnings are on the recovery path, which companies wanted to be sure about before they raised their dividends,” said John Carey, a money manager at Pioneer Investments, which oversees about $250 billion. “I feel relatively confident that most of the dividends out there are secure, and we'll see some fairly broad-based increases.”
RECORD PROFITS
Analysts said that S&P 500 profits will rise 16% this year and surpass $100 a share for the first time in 2012, helping to persuade executives at companies from CBS Corp. Ticker:(CBS) to Pioneer Natural Resources Co. Ticker:(PXD) and Wal-Mart Stores Inc. Ticker:(WMT) to boost payouts. U.S. companies increased stock buybacks last year, making it the fifth-biggest year for share repurchases since at least 1985, according to Birinyi Associates Inc.
With $76 billion announced, last month was the best month for buybacks since December 2007.
Chief executives are spending more on shareholders after stockpiling cash since 2008 when the financial crisis eliminated profits. They bought back $325.8 billion of stock last year, more than double 2009's repurchases, Birinyi data show.
About $191.1 billion of takeovers in the United States have been announced so far this year, on track with the $198.2 billion as of March 11, 2010, according to Bloomberg data.
Companies that return the most money to shareholders have beaten the index by 11 percentage points since the bull market began, data compiled by Bloomberg show.
Archer Daniels Midland Co. Ticker:(XNYS), the world's largest grain processor, has the biggest weighting in the S&P 500 Dividend Aristocrats Index and has jumped about 20% this year. The company pays a dividend yield of 1.77%.
AT&T, AMAZON
Dividends relative to share price exceed 6% for AT&T Inc. Ticker:(T), the second-largest U.S. wireless carrier, and Lorillard Inc. Ticker:(LO), maker of Newport cigarettes. Companies that pay nothing to shareholders include Amazon.com Inc. Ticker:(AMZN), the largest online retailer, and Apple Inc. Ticker:(AAPL), which produces iPhones and iPads.
The economic expansion that began in mid-2009 last year spurred the biggest jump in profits since 1988, pushing cash to an all-time high of $937 billion for companies in the benchmark U.S. equity index, S&P data show. This year, there have been 95 increases and no decreases to payouts in the S&P 500.
Corporations with dividends have climbed 3.8% on average this year, compared with a 2% rally for those without. Mutual funds that focus on companies trading at the cheapest levels relative to earnings — and that pay the highest dividends — beat their peers this year.
So-called value managers overseeing at least $1 billion have returned 3% on average this year, compared with 2.5% for growth funds, data compiled by Bloomberg show.
'REWARDING QUALITY'
“The market is continuing to be ready for rewarding quality companies, and in general, those companies tend to pay dividends,” said Jay Kaplan, the co-manager of the Royce Value Fund, which beat 96% of its peers over the past five years. “In this leg of the market, you have a good shot of quality companies doing well.”
Higher oil prices may cut profits so much that dividend increases won't be enough to entice investors, said Walter Todd, who helps oversee about $900 million at Greenwood Capital Associates LLC.
“If margins are rolling over, that could precipitate weaker earnings and then stock prices following that down,” he said. “The dividend's going to help, but it may not offset the decline in price.”
OIL'S SURGE
Crude futures trading in New York jumped 28% to $106.95 a barrel from their low Feb. 15 to the high March 7 as political unrest in Egypt and Libya threatened to curtail supplies.
Oil will drop to $99 a barrel in New York next quarter, according to The Goldman Sachs Group Inc. U.S. gross domestic product will expand 3.1% this year, matching the level in 2005, according to the median estimate in a Bloomberg survey of 89 economists.
Although the bull market just passed its second anniversary, dividends haven't increased during a calendar year since the financial crisis began in 2007. Seventy-eight companies slashed them by a record $48 billion in 2009 to maintain cash as sales slumped, S&P data show.
At the same time, corporate expense cuts helped prop up earnings, driving last year's 36% growth and widening the ratio between yields on profits and dividends.
EXCEEDING PAYOUTS
Earnings are exceeding payouts in the S&P 500 by a rate that preceded higher dividends in the past. On average, executives boosted payouts 16% during periods when the ratio topped 3, according to Bloomberg data going back to 1998.
CBS, owner of the most-watched U.S. television network, trades with an earnings yield of 6.9 times its dividend rate, a ratio that reached 7.1 on March 3, the highest since at least 2006, Bloomberg data show. The company outperformed the S&P 500 by surging 25% this year through last week, compared with the index's 3.7% climb.
CBS posted an almost fivefold increase in fourth-quarter profit. The company cut the quarterly dividend in 2009 to 5 cents, from 27 cents, and while earnings have surpassed estimates for six straight quarters, CBS hasn't boosted the payout.
Data compiled by Bloomberg shows that it may increase the dividend to 8 cents a share when it declares on May 26.
'VERY GOOD'
“Our cash position is very good,” chief executive Leslie Moonves said during a Feb. 24 conference with analysts and investors. A dividend increase is “something we are discussing very seriously, but no decision's been made yet.”
Dana McClintock, a CBS spokesman, declined to comment. At Pioneer Natural, profit will more than double to $3.07 a share this year, according to the average analyst estimate in a Bloomberg survey. The earnings yield is higher than the dividend payout after the relationship flipped at the end of 2009.
The oil and gas producer will double its payout Aug. 29, according to Bloomberg projections. Its shares have risen about 9.5% this year.
Susan Spratlen, a Pioneer spokeswoman, didn't respond to a telephone message or e-mail seeking comment.
“We've seen that dividends are a huge way for you to lower risk and lower volatility in the assets that you're buying,” said Dan Neiman, who helps manage the Neiman Large Cap Value Fund, which beat 97% of peers over the past five years.
