Throughout the postwar period, U.S. companies have tended to pay out more of their profits in dividends than their foreign competitors--a tendency that is partly reflected in higher savings rates overseas. But since the early 1980s, as economist Joseph Ford of WEFA Group observes, Corporate America has been distributing even more of its profits than in the past (chart).
Such a high payout policy may please many shareholders, but its long-run implications seem ominous. For companies to retain less for investment hardly bodes well for productivity and growth.
Ford thinks two legacies of the 1980s are partly to blame for the trend. The first is the hostile-takeover binge. To ward off raiders, he says, "many corporate financial officers inflated dividend payments in the hopes of encouraging stockholders to resist the overtures of takeover artists."
The second is the change in capital-gains taxes. Prior to 1987, capital gains were taxed at a lower rate than ordinary income--encouraging stockholders to forgo dividends in favor of future gains. By eliminating the big gap between the rates, the 1986 tax-reform act reduced the incentive for managers to reinvest earnings in the business.
But while these developments may have fostered generous dividend payouts, economist Rosanne Cahn of First Boston Corp. argues that the main cause has been a less promising business environment. Rather than the "fat years," she says, the 1980s were actually a period of lower profitability than earlier decades. And her analysis of dividend policies shows that industries with the worst profit performance tended to raise payouts the most.
"Lacking investment opportunities offering competitive returns," says Cahn, "companies with poor profit margins have responded rationally by slowly shrinking their operations via high dividend payments." The good news, she adds, is that this process may be drawing to an end. Once the global economy turns up, the prospect of growing demand in the face of a leaner U.S. industrial base suggests that companies will want to hang on to more of their profits to invest for the long haul.