Profit Margins at 18-Year High Signal Bigger Dividends Coming for S&P 500
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 percent in 2011, the highest level in at least 18 years, according to data compiled by Bloomberg on non-financial companies in the Standard & Poor’s 500 Index through March 11. Greater profitability combined with dividend cuts during the credit crisis have pushed earnings to 6.53 percent 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. (AET) and Carnival Corp. have raised dividends as the fastest economic expansion in six years and five straight quarters of earnings growth increased confidence among chief executive officers. 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 Boston- based 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.”
The S&P 500 fell 1.3 percent to 1,304.28 last week, after the U.S. trade deficit and claims for unemployment benefits exceeded estimates and export growth in China slowed to the lowest rate since 2009, according to data compiled by Bloomberg. The retreat extended the S&P 500’s loss since reaching a 32- month high on Feb. 18 to 2.9 percent. The gauge has rallied 93 percent from its March 9, 2009 low.
The benchmark index slumped 0.6 percent to 1,296.39 at 4 p.m. New York time today as investors struggled to assess what impact the worst Japanese earthquake on record will have on the world’s third-largest economy. The 8.9-magnitude temblor on March 11 may have killed 10,000 in the Miyagi prefecture north of Tokyo, said Go Sugawara, a spokesman for the prefectural police department. The official toll reached 1,833 dead, with 2,369 missing, the National Police Agency said.
Analysts say S&P 500 profits will rise 16 percent this year and surpass $100 a share for the first time in 2012, helping persuade executives at companies from CBS Corp. (CBS) to Pioneer Natural Resources Co. (PXD) and Wal-Mart Stores Inc. (WMT) to boost payouts. U.S. companies increased stock buybacks in 2010, making it the fifth-biggest year for share repurchases since at least 1985, according to Birinyi Associates Inc. With $76 billion announced, February was the best month for buybacks since December 2007.
CEOs are spending more on shareholders after stockpiling cash since 2008 when the financial crisis eliminated profits. They bought back $325.8 billion of stock in 2010, more than double 2009’s repurchases, Birinyi data show. About $191.1 billion of takeovers in the U.S. have been announced so far this year, on track with last year’s $198.2 billion as of March 11, 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., the world’s largest grain processor, has the biggest weighting in the S&P 500 Dividend Aristocrats index and has jumped 20 percent this year. The Decatur, Illinois-based company pays a dividend yield of 1.77 percent.
Dividends relative to share price exceed 6 percent for Dallas-based AT&T Inc. (T), the second-largest U.S. wireless carrier, and Greensboro, North Carolina-based Lorillard Inc. (LO), maker of Newport cigarettes. Companies that pay nothing to shareholders include Seattle-based Amazon.com Inc. (AMZN), the largest online retailer, and Apple Inc. (AAPL), which produces iPhones and iPads from Cupertino, California.
The economic expansion that began in mid-2009 spurred the biggest jump in profits since 1988 last year, 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 percent on average this year, compared with a 2 percent rally for those without. That’s helping 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 percent on average in 2011, compared with 2.5 percent for growth funds, data compiled by Bloomberg show.
“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 that beat 96 percent of its peers in 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 in Greenwood, South Carolina.
“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.”
Crude futures trading in New York jumped 28 percent to $106.95 a barrel from their low on Feb. 15 to the high on March 7 as political unrest in Egypt and Libya threatened to curtail supplies. A surge to $140 may spur a recession, Nouriel Roubini, the New York University professor and chairman of Roubini Global Economics LLC who predicted the financial crisis, said in Dubai on March 8.
Oil will drop to $99 a barrel in New York next quarter, according to New York-based Goldman Sachs Group Inc. U.S. gross domestic product will expand 3.1 percent in 2011, matching the level in 2005, according to the median estimate in a Bloomberg survey of 89 economists.
While 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 percent growth and widening the ratio between yields on profits and dividends.
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 percent 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 New York-based company outperformed the S&P 500 by surging 25 percent this year through last week, compared with the index’s 3.7 percent 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 it may increase the dividend to 8 cents a share when it declares on May 26.
“Our cash position is very good,” Chief Executive Officer 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 further.
At Pioneer Natural, profit will more than double to $3.07 a share in 2011, 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 Irving, Texas-based oil and gas producer will double its payout on Aug. 29, according to Bloomberg projections. Its shares have risen 9.5 percent in 2011.
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 (NEIMX), which beat 97 percent of peers in the past five years. “The earnings growth we’re seeing is going to translate down the road to more dividend payout.”
Wal-Mart, the world’s largest retailer, raised its dividend by 21 percent to 36.5 cents on March 3. The Bentonville, Arkansas-based company has increased its payout every year since 1974, according to data compiled by Bloomberg.
Wal-Mart doesn’t have any plans to increase its dividend further than the March 3 announcement, according to Greg Rossiter, a company spokesman.
“The big multinational, big dividend payers continue to be where the value is,” Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York, said last week in a Bloomberg Television interview. He owns Wal-Mart shares and said he would “absolutely” buy more, “given the cash generation they do, the dividends they are going to be paying in the future, the kinds of things they’re doing for shareholders.”
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