Dividends: On the Rise Again?

One in six companies on the Standard&Poor's 500 index may raise its next dividend payment as a rebound in the global economy boosts cash earnings.

AT&T (T), Wal-Mart Stores (WMT) and Raleigh, North Carolina-based Progress Energy (PGN) are among 79 companies in the index that may boost dividends, according to data compiled by Bloomberg. An 80th company, Ecolab Inc., the world's largest maker of cleaning chemicals for hotels and restaurants, increased its payout yesterday. About 2% of the members may reduce their next payment.

"The economic recovery is in place," John Crawford, chief investment officer of Crawford Investment Counsel Inc. in Atlanta, said yesterday in a telephone interview. "With that you will see some improvement in dividends in an overall sense, but they too will be coming along at a slower pace."

Companies that have large market share, strong finances and pay above-average dividends are attractive for investors looking for safe returns as 10-year U.S. Treasuries yield less than 3.5%, said Crawford, who manages $2.5 billion of securities. AT&T, based in Dallas, has a projected 12-month dividend yield of 6.1% and Progress, the owner of utilities in three U.S. Southeast states, is expected to pay 6.2%.

Dividends tend to reflect the prior year's profits and so won’t rebound for many U.S. companies until 2011, said Kevin Shacknofsky, who manages about $2 billion for Alpine Mutual Funds in Purchase, New York.

Reversing Declines

The U.S. economy rose at a 2.8% annual pace in the third quarter after declines in the previous four quarters, the Commerce Department said last month. The unemployment rate climbed to a 26-year high of 10.2% in October.

Utilities, which have posted steady profits during the recession, led all sectors in projected 12-month dividend yields with 4.9%, according to a Bloomberg December dividend report. The communications industry was the next highest with a yield of about 4%, the report said. The projected 12-month yield for all companies on the S&P 500 Index that pay a dividend is about 2.1%.

Progress has increased its dividend every year since at least 1999 and is forecast to raise it by 0.5 cent in an announcement this month, according to the Bloomberg data. The company's shares rose 47 cents to $40.65 yesterday in New York Stock Exchange trading and have gained 2% this year.

"We recognize that our shareholders value the dividend as an integral component of the total shareholder return proposition," Progress Energy Chief Financial Officer Mark Mulhern said in an e-mail.

Cuts in 2009

AT&T strives to provide its board the financial flexibility to "consider dividend growth," said Michael Coe, a spokesman for the largest U.S. phone company. AT&T increased 17 cents to $27.52 yesterday for a decline of 3.4% this year.

John Simley, a spokesman for Bentonville, Arkansas-based Walmart, declined to comment on dividend plans for the world's largest retailer.

Some of the increases in dividends next year will be from companies that had cut payments or eliminated them this year or in 2008 because of "near-death experiences," Shacknofsky said.

Thirty-three companies on the S&P 500 had lower dividend payments this year compared with 2008, Bloomberg data show.

Banks including Bank of America (BAC) of Charlotte, North Carolina, and Citigroup (C). slashed dividends amid the deepest recession since the 1930s. New York-based Citigroup, which paid 32 cents a share, discontinued its dividend this year. Bank of America reduced its quarterly payment to 1 cent a share from as much as 64 cents last year.

"The biggest payers out there were the financials," Shacknofsky said. "So in dollar terms, dividends are still weak."

Share Buybacks

Companies are also beginning to use cash from rebounding profits to buy back stock. Chubb Corp., the insurer of commercial property and high-end homes, approved a repurchase program this week of 25 million shares.

General Dynamics (GD), the producer of Abrams battle tanks and Gulfstream business jets, this week announced plans to buy back as many as 10 million shares. The Falls Church, Virginia-based company is forecast by Bloomberg to raise its dividend in March by 2 cents to 40 cents a share. Spokesman Rob Doolittle declined to comment.

Shacknofsky said companies should be raising dividends instead of buying back shares. "They should leave playing the market to investors, and they should rather give cash back as dividends," he said.

Select companies such asCoca-Cola (KO) and Walmart have held up well during the recession and maintained dividend increases, Crawford said. Those companies are a safe haven during this period of low interest rates and slow recovery.

"That's why AT&T and Progress and some of these names are attractive," Crawford said. "You are just as safe and you're better off because you have higher yield."

The Bloomberg dividend data is based on seven criteria including a company’s guidance, dividend history, regression analysis, and put-call parity. It had had an accuracy rate of 87% for dividend forecasts for the U.S., Europe and Asia in the third quarter, compared with 61% for market analysts.