The Dividend Also Rises

Dividends are popping up all over. Corporations, flush with earnings and finally convinced that the economic recovery isn't going to evaporate, are loosening purse strings and rewarding shareholders. The upshot: The number of dividend increases reported in first-quarter 1994 hit a 13-year high.

The first quarter's tally of 551 dividend hikes is the highest in any first quarter since 1981, confirms Standard & Poor's Corp. Arnold Kaufman, editor of S&P's The Outlook, attributes much of the rise to the 7% increase in gross domestic product in 1994's fourth quarter. Companies in the S&P 500-stock index raised dividends 4.3% in the first quarter vs. a year earlier, and Kaufman expects an average increase for the full year of 7% or 8%--vs. just 2.5% in 1993. "Companies feel confident now," Kaufman says. "One thing they hate to do is increase a dividend and then have to cut it back."

Perhaps the most dramatic example is Citicorp's announcement on Apr. 18 that it will reinstate its dividend. Concerns over capital levels and souring investments led the banking giant to suspend its payout in the third quarter of 1991. But after racking up earnings of $2.2 billion in 1993, Citi announced that it would be paying a 15 cents dividend in the second quarter. "The combination of increased interest income, no growth in loans, and good profitability is tailor-made for dividend increases" by the banking industry, says Bruce Baughman, co-manager of the $275 million Franklin Rising Dividends Fund.

UNDERWHELMING. Other companies in the financial industry also have more money to pass along to their shareholders. After first-quarter net income soared to a record $371.8 million, Merrill Lynch & Co. announced a 15% dividend boost on Apr. 19. On Apr. 20, Dun & Bradstreet Inc. weighed in with a 6.6% increase.

Still, many of the recent dividend increases have been underwhelming. "It reflects wariness on the part of corporations," says Geraldine Weiss, editor of Investment Quality Trends, a La Jolla (Calif.) newsletter. "They don't want to overextend themselves by promising generous increases, but they're satisfying shareholders with at least something."

Indeed, the double-digit hikes by banks and such cyclical companies as Ford Motor Co. are the exception rather than the rule. After years of dividend boosts averaging about 18% annually, drugmaker Bristol-Myers Squibb Co. hiked its dividend by just 1.4% in the first quarter. Lackluster earnings also kept dividend increases from such companies as Philip Morris Cos. in the single digits. "There's too much uncertainty in the market and the economy right now," notes Weiss. "Companies are being a little tightfisted because they don't know what expenses will be until legislation is passed on health-care reform."

Surprisingly, electric utilities are among the biggest tightwads of all. They typically pay out 50% of their earnings in dividends and have a long history of raising dividends annually. But poor profits have ratcheted some utilities' payout ratios to historically high levels of 75% or more, explains Roger D. Newell, who manages the $940 million Vanguard Equity-Income Fund. That leaves little room for further hikes.

One example: After 46 consecutive years of making higher payouts, Dallas-based Texas Utilities Co. acknowledges that it won't be able to increase its dividend this year. Weiss thinks Texas Utilities may even have to omit its dividend entirely, although the company says it has no plans for such a move.

At most companies, the outlook is good for continued increases. The average yield on S&P 500 stocks is still just 2.9%, low by historical standards. With interest rates rising, dividend yields may have to rise, too, to stay competitive. So, if the economy keeps expanding and the Federal Reserve's tightening doesn't spook consumers, the odds look good for dividends to keep rising. Now if the darned stock market would just turn around....

                      First-quarter   Increase from
                      dividend         prior quarter
      SQUIBB              0.73             1.4%
      CITICORP*           0.15              NM
      FORD**              0.45            12.5
      MOTOROLA            0.14            27.0
      PHILIP MORRIS       0.69             6.2
      *Suspended dividend payments in 1991's third quarter
      **Class B shares           NM = not meaningful  DATA: BUSINESS WEEK