Cash-rich firms skimp on dividends
Fewer big companies lift payouts in 2006, ending an uptrend.
More is spent on buybacks.
By Tom Petruno, Staff Writer
Los Angeles Times
Friday, December 29, 2006
Investors in Mattel Inc., McDonald's Corp. and Home Depot
Inc. got hefty cash bonuses this year for being
shareholders. All three raised their dividend payments 30%
But corporate generosity with dividends overall didn't live
up to some analysts' expectations.
That is stoking concern about the outlook for payouts in
2007 and beyond — at a time when the growing ranks of
retirees may have more need for rising income from their
"We thought companies would do more" with dividends this
year, given that corporate earnings surged, said Howard
Silverblatt, a senior analyst at data firm Standard & Poor's
in New York.
Within the blue-chip S&P 500 index, the number of companies
raising or initiating dividends totaled 304 this year, down
from 317 in 2005. That breaks a strong uptrend in place
since 2003, when 267 of the companies in the index lifted or
Dividends had been on the rise in recent years as corporate
earnings boomed amid a global economic expansion. Dividend
payments typically improve with companies' fortunes.
Corporations have had another incentive to lift their cash
payouts to investors: Congress in 2003 slashed the top
federal tax rate on dividend income to 15% from 38.6%,
making dividends much more lucrative for shareholders than
The decline in the number of blue-chip dividend increases
this year may stem in part from corporate fears of a weaker
economy slowing earnings growth in 2007.
Companies often hesitate to commit to bigger dividends when
they expect their earnings growth to decelerate, because
dividends generally are paid out of retained profit.
But something else is holding back dividend increases, many
analysts say. Instead of handing out more cash to
shareholders, many companies are spending record sums to buy
In theory, buybacks can help push up stock prices, rewarding
shareholders with capital gains. And by reducing the number
of shares outstanding a company can boost its earnings per
share, potentially making its stock more valuable.
Still, those are just possible effects — whereas a dividend
payment is hard cash in investors' pockets.
S&P 500 companies shelled out $110 billion for stock
buybacks in the third quarter, twice what they paid in
dividends, S&P data show.
Cash dedicated to buybacks has mushroomed since 2004, while
total dividends have grown much more slowly.
"We are concerned that the large expenditures on buybacks
may be inhibiting dividend growth," Silverblatt said.
He noted that companies can suspend buyback programs at any
time. Dividends, by contrast, tend to represent a long-term
commitment from a company to its shareholders. Most firms
are loath to cut their payouts because of the negative
message that can send to investors who have become used to
Jack Ablin, chief investment officer at Harris Private Bank
in Chicago, generally prefers dividends to buybacks.
It makes sense for a company to use cash to buy back its
stock, he said, if the shares are trading for less than the
company's net worth, or book value — meaning assets minus
liabilities. But today, with the S&P 500 index near a
six-year high, "very few stocks are trading below book
value," Ablin said.
He also believes that executives favor buybacks on the hope
that the purchases will temporarily lift the share price, in
turn boosting the value of any stock options they may want
to cash in.
Many major companies are spending money on both buybacks and
higher dividends. Fast-food giant Yum Brands Inc., which
owns Taco Bell, KFC and other chains, this month doubled its
quarterly dividend to 30 cents a share. It also spent $337
million to buy back stock in the third quarter.
Ablin, who holds Yum Brands in Harris' portfolio, said he
was happy with the company's dividend and buyback programs.
But with corporate coffers brimming with cash, other
companies could be more generous, he said.
"It's maddeningly frustrating to me that corporations are
hoarding cash and sitting there," he said.
Computer networking giant Cisco Systems Inc. pays no
dividend, even though the San Jose-based company has $19.5
billion in cash and securities on its balance sheet.
Cisco believes that its stock buyback program, "combined
with ongoing strategic investments in our business and
maintaining a strong cash balance, are in the best interest
of our shareholders," according to a statement on the
Some companies have been much more eager to share profit
with investors via dividends.
El Segundo-based toy maker Mattel raised its annual dividend
30% on Nov. 17, from 50 cents a share to 65 cents. Chief
Executive Robert A. Eckert said the move "demonstrated
[Mattel's] commitment to returning excess funds to
McDonald's, under pressure by activist investors to improve
returns, boosted its annual dividend 49% in September, from
67 cents a share to $1.
In November, Home Depot lifted its quarterly payout by 50%
for the second time this year, bringing it to 22.5 cents a
Some Wall Street pros believe that retiring baby boomers,
seeking income growth that fixed-rate bonds or bank accounts
can't provide, increasingly will turn to stocks of firms
that raise dividends at least once a year.
The tax change in 2003 left dividends and long-term capital
gains taxed at the same rate. Before then, capital gains
usually had a tax advantage.
Pension funds also may have to rely more on rising dividends
to meet their obligations, particularly if bond yields stay
relatively low, analysts say.
"What gets us excited about dividends is that we think we're
entering an environment when they will be valued more" by
investors, said Doug Sandler, chief equity strategist at
Wachovia Securities in Richmond, Va.
That could mean higher prices over time, he said, for
dependable-dividend shares than for companies that have
similar growth prospects but aren't as forthcoming with cash