Dividends, or With A Little Help From My Friends

Practically all of the dividend news is good – February is the busiest month for increases (fiscal over, annual going out, share holder meeting coming up). From the start of Dec,’09 there have been 52 increases and just 2 decreases, vs. a devastating 3-month Feb,’09 of 58 increases and 42 decreases, vs. 106 increases and 10 decreases for the 3-months ending Feb,’08 and 115 and 2 for Feb,’07. We expect the month to remain good, with several more Aristocrats increasing (see file). However, we also expect some bad news to start up soon. We still count 26 issues that didn’t make as much as they paid out last year and aren’t expected to cover their dividend this year – and that’s on estimated Operating earnings. Overall, the top payers are relatively healthy as far as coverage and earnings go (then again weren’t the Financials in ’06?), and more diverse than has been the pre-recession history.

Outside the index things are similar, with more increases and a lack of decreases. I count over 200 issues (non-500) that similarly haven’t covered their dividends and aren’t expected to do so in 2010. While cash levels as of Q3 were at an all time high (expect them to slightly drop for Q4), the question of how long an issue can, or should, pay a dividend if it is not making the payout needs to be asked (and I’m a dividend person).

Bottom line is that dividends are getting better, but they are not well yet. There are attractive issues, but most of the ‘safer’ ones have lower yields; if you want more yield you need to take more risk.

Future Dividends

After the close of Friday, BRK.B will go into the index and BNI will come out. That means that $545 million in dividends is being removed and zero is being added. That change will reduce the S&P 500 Indicated dividend rate by $0.06 and have a 27 bps impact on our new dividend index (more on that next month), since their will be no March BNI ex-dividend value (fyi – BRK.B was $68.00 on Jan 26 when the announcement was made to add it to the index; it’s now $76.34)

FirstEnergy plans to purchase Allegheny Energy for shares (announced today, electric utility M&A among 500 issues is raw – in the past dozen years I only find Duke Energy’s purchase of CINergy in 2006). Both issues pay dividends, but FirstEnergy pays more and the merger will add $147 million to the S&P 500 dividend payment. As for Allegheny’s replacement (if the deals goes through and subject to committee vote), dividends are not a criteria for 500 membership, and given that 46.2% of the non-500 domestic common (NY, ASE, NASD) pay dividends vs. 73.6% of the index that pays, dividend growth has to gain just to break even, and growth via membership is not a statistically wise bet.

With A Little Help From My Friends I’ve calculated that it will be late 2012 to 2013 until S&P 500 issues pay as much in dividends ($249B) as they did in 2008. How can that change – well just playing with the numbers there are three issues and one coming in that currently do not pay and if they decided to pay a 1% yield they would each add at least $1 billion to index: Apple, Cisco, Google and (as of Friday’s close) Berkshire Hathaway. Combined they would add $5.5 billion, at 1%. I’ve written about BRK and the ‘Man Who Refuses To Pay A Dividend’, but that was the same man that refused to split his stock. The BRK stock portion for BNI is worth $10.5 billion – somehow, if he didn’t want BRK to be held by the masses, he would have found the money (maybe friends at Goldman?). Download file

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