NO GOOD DEED GOES UNPUNISHEDHoward Silverblatt
Dividend increases in the general market were down 5.7% in 2007 http://www2.standardandpoors.com/spf/pdf/index/010307_DividendGrowth.pdf; however, dividends in the S&P 500 were up, with 78% of S&P 500 companies paying a dividend and 60% actually increasing their cash payments last year http://www2.standardandpoors.com/spf/pdf/index/122707_500-DivRateChange.pdf. These numbers provide a striking contrast to the non-S&P common market where 39% of companies pay dividends and 28% actually increased their rate in 2007. These differences have nothing to do with being in or out of the index — dividends are not a criteria for S&P 500 membership – but the differences are related to the stocks’ dividend history.
Over the last year and half, expenditures on buybacks http://www2.standardandpoors.com/spf/pdf/index/121307_SP500_THREE_YEARS_OF_BUYBACKS.pdf have ballooned at the expense of dividend increases. However, this is not true for all individual dividend payers. Most dividend payers increase their rate ever few years, depending on their earnings, cash flow and peer pressure. These are the companies that are holding back on the increases and, in many cases, using the money that might have gown directly to shareholders for buybacks. Other companies, which have a history of increasing their rate year after year, are stuck. They may not want to increase their rate, but after so many years of annual increases they have no choice. The expectation of an increase is not only there, but it’s built into the price. If they don’t increase their dividend they better have a great reason why and, in over 30 years, I’ve only seen this happen once: Autodesk, a company whose stock was up 150% year-to-date in November 2004 when it decided that a 0.2% annual yield paid quarterly was not worth the paperwork.
The stats are clear: 103 companies in the S&P 500, which equates to 20.6% of the index, have increased their dividends in each of the last ten years http://www2.standardandpoors.com/spf/xls/index/1500_DIVIDEND_INCREASES.xls; but only 206 non-index issues, or 3.3% of that market, have done so.
So the question is: will those stocks, such as the Financials who have a long history of increasing their dividends, continue to increase them, and, in some cases, even continue to pay at all?
The Financials are under enormous pressure. Their third quarter earnings were down 37%, their fourth quarter is expected to be down 60%, and the first half of 2008 is expected to show negative growth. The sector’s stock price is down more than 25% over the last 3 months, a fact which has significantly increased their yield.
Citigroup, a major dividend payer (third in the index at $10.8 billion), has seen it stock decline 49% from year-end 2006, and now yields 7.6%, amidst a very public discussion about its ability, and willingness, to continue to pay. Then their is First Horizon, down 60%, with a double digit yield of 10.8%; Wachovia, is down 38% and yielding 7.2%; and Bank of America, (the second largest payer at $11.4 billion) is down 25%, and yielding 6.4%. In all, there are 15 Financials, representing 13% of the S&P 500 aggregate dividends payment, now yielding at least 6% compared to none at year-end 2006, when the highest yielding Financial paid 4.6%. Nice rates, but can they continue?
Dividend history shows us that companies with a long history of increases have a strong tendency to continue to increase, in good times and bad. And, while Financials have already pulled back on their buybacks, that reduced support for their stock is nothing compared to the selling pressure that cutting its dividend would bring. As we learned from Merck, companies with a long dividend history come under significant pressure from holders not to cut their rate. In the Merck case, while the company stopped its 30 year plus streak of annual increases, the pharmaceutical giant continued to pay dividends. The result was that investors who used the Dividend Reinvestment Program gained substantially as they dollar averaged in at a lower cost.
The bottom line is that these companies cut their dividends as a last resort and, that in some manner or form, the Financial industry will have to survive, if for no other reason than to help the economy grow (and survive). While some will falter, there will be considerable self-imposed pain prior to any dividend cut. High yields are a sign of a distressed stock, but not all distressed stocks stay distressed, especially over the holding period of dividend investors, which is usually measured in decades, not months.
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