June 2 (Bloomberg) -- Dividends may be in jeopardy at almost three dozen of the biggest U.S. companies where annual payouts exceed cash flow from selling everything from cars to mobile telephones to newspapers.

General Motors Corp., the biggest U.S. automaker, produced 33 cents a share in so-called free cash flow last year while maintaining a $1 dividend. Motorola Inc. took in 8 cents a share from operations after capital expenses, and paid a 20-cent dividend. New York Times Co. pays investors 92 cents per share a year and spent $1.87 a share more on operations than it made in cash.

Investors are depending on dividends to limit losses as the Standard & Poor's 500 Index falls for the first time since 2002, the U.S. economy slows and corporate earnings drop for a fourth quarter. While the S&P 500 declined 9.4 percent in the past year, reinvested dividends reduced the loss to 7.6 percent, according to data compiled by Bloomberg.

``If earnings and cash flow don't match your dividend, it's not a sustainable thing,'' said Phillip Davidson, who oversees $18 billion as chief investment officer for value equities at American Century Investments in Kansas City, Missouri. ``Some companies will cut their dividends and others will choose to rough it out.''

34 Companies

GM, Motorola and New York Times declined to comment on their dividends. A total of 34 companies in the S&P 500 outside of real estate, banking and power generation paid more in dividends than they made in free cash flow in the past year, according to data compiled by Bloomberg. Motorola, GM and New York Times are among those whose dividends will be costliest to keep, analysts say.

Many of the companies on the list, including Limited Brands Inc. and Nordstrom Inc., exceeded cash flow with dividends for reasons that are unlikely to be repeated, according to analysts.

S&P 500 companies that pay dividends increased to 390 at the end of last year from 350 in 2002, spurred by a 2003 law that reduced the tax on payouts to 15 percent from as much as 38.6 percent, according to S&P.

U.S. dividend yields fell to a five-decade low of 1.14 percent in 1999 as shareholders urged companies to invest more to develop their businesses, according to data compiled by Bloomberg and New York University.

Little Changed Shares

Microsoft Corp., the biggest software maker, declared its first dividend in January 2003 following a 54 percent plunge in its stock. Redmond, Washington-based Microsoft's shares have added 1.5 percent since then. Including the payout, they returned 20 percent.

Citigroup Inc., the biggest U.S. bank, lost 49 percent of its stock value since Oppenheimer & Co. analyst Meredith Whitney predicted on Oct. 31 the New York-based bank would cut its dividend. The company reduced the quarterly payment to 32 cents a share from 54 cents in January after reporting a record $9.8 billion fourth-quarter loss.

Motorola, the biggest U.S. mobile phone maker, provided a 5- cent quarterly dividend since 2006. The payment last year was more than double the Schaumburg, Illinois-based company's 8 cents a share in free cash flow.

Paul Liska, Motorola's chief financial officer, said on an April 24 conference call that the company had enough cash to continue its dividend.

Motorola will divide into two companies next year, one focused on handsets, the other on network equipment, cable TV set-top boxes and two-way radios.

`Convenient Cover'

The split gives ``convenient cover for establishing a net lower dividend,'' wrote James Kelleher, an analyst at Argus Research in New York, in an e-mailed response to questions. Motorola shares fell 42 percent this year.

Jennifer Weyrauch-Erickson, a Motorola spokeswoman, declined to comment.

General Motors, based in Detroit, cut its annual payout in half to $1 a share in February 2006. Last year, free cash flow was $189 million, less than the $567 million needed to pay its dividend.

GM said May 13 that it may have to borrow and reduce spending if the U.S. economy worsens. The company said last week that 19,000 workers accepted buyout packages and will leave as part of a cost-savings program. Analyst Himanshu Patel at JPMorgan Chase & Co. said in a May 5 report that the dividend may be in jeopardy.

GM spokeswoman Julie Gibson declined to comment on GM's dividend.

New York Times

New York Times paid shareholders $125 million last year while spending almost $270 million more on its operations than it generated in cash.

The company raised the quarterly dividend 31 percent to 23 cents a share in March 2007, the biggest increase in at least a decade, prompting Standard & Poor's and Moody's Investors Service to lower the New York-based company's debt ratings. The shares have fallen 33 percent in the past 12 months and reached an 11- year low of $14.48 in January, after sales declined in four of the past five quarters.

Dividend increases by newspaper companies are ``a core strategy'' to retain shareholders, said Ken Doctor, an analyst at media consulting firm Outsell Inc. in Burlingame, California. The Times is cutting 100 jobs this year, or 7.5 percent of its newsroom employees.

``They did that even before cutting their dividend, which I think surprised a lot of people,'' Doctor said.

Spending Reduced

New York Times spokeswoman Catherine Mathis declined to comment on the dividend. The company plans to reduce its capital expenditures to $150 million to $165 million this year, she said. The expense was $380.3 million last year, according to a filing with the Securities and Exchange Commission.

Most companies whose dividend payouts exceed free cash flow won't be forced to cut their dividends this year, analysts said.

Limited Brands, owner of the Victoria's Secret lingerie chain, generated 4 cents in free cash flow last year while maintaining a 60-cent annual dividend. Department-store company Nordstrom had negative free cash flow of $1.39 a share in 2007 and raised its payout to 64 cents from 54 cents in January.

The dividends are sustainable because cash flow fell for reasons that won't be repeated, said Richard Jaffe, a Baltimore- based analyst for Stifel Nicolaus & Co. Limited Brands temporarily increased spending on real estate, while Nordstrom transferred receivables to its balance sheet.

Investors should weigh the ``dividend sanctity, earnings resilience and earnings stability'' of companies they own, said David Darst, who helps oversee more than $700 billion as chief investment strategist at Morgan Stanley Global Wealth Management in New York. ``Dividends are going to be important if we're in a sideways market.''

Companies in S&P 500 whose dividend payments exceed free cash
flow. List excludes financial companies, REITS and utilities.

Alcoa Inc.
Anadarko Petroleum Corp.
Archer-Daniels-Midland Co.
Ashland Inc.
Avon Products Inc.
Carnival Corp.
Consol Energy Inc.
Dillard's Inc.
Eastman Kodak Co.
General Motors Corp.
Hess Corp.
Jabil Circuit Inc.
JC Penney Co.
Leucadia National Co.
Limited Brands Inc.
Jones Apparel Group Inc.
Lowe's Cos.
Motorola Inc.
Murphy Oil Corp.
New York Times Co.
Newmont Mining Corp.
Nordstrom Inc.
OfficeMax Inc.
Peabody Energy Corp.
Questar Corp.
Range Resources Corp.
Rowan Cos.
Ryder Systems Inc.
Sara Lee Corp.
Target Corp.
Trane Inc.
United Parcel Service Inc.
Weyerhaeuser Co.
Whole Foods Market Inc.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: June 2, 2008 10:15 EDT