Dividend Bull Case Deflates as Payouts Rise Least Since 2010by
CEOs scaling back a key ownership perk amid profit decline
Number of reductions will more than double to 22 this year
The biggest expansion of U.S. stock dividends in eight decades is slowing to a crawl.
Payouts by companies in the Standard & Poor’s 500 Index are poised to rise about 5 percent in the fourth quarter, the smallest increase since they plummeted in the aftermath of the 2008 financial crisis, data compiled by Bloomberg and S&P Dow Jones Indices show. With earnings and revenue declining, chief executive officers are scaling back a key perk of ownership that has supported American equities for the last six years.
The deterioration adds to concerns including Federal Reserve interest rate policy and a slowing global recovery for American investors who have relied on the stock market as a source of income as bond interest hovered at its lowest levels ever. While stocks still hold a yield advantage over 10-year Treasuries, defending it is getting harder as a six-year expansion in profits grinds to a halt.
“The growth that you can confidently put behind the dividend increase is just not there,” Chris Bouffard, chief investment officer who oversees about $10 billion at Mutual Fund Store in Overland Park, Kansas, said by phone. “Many people have been bringing down their capital market assumptions. Certainly the dividend component not growing as much is one factor.”
The S&P 500 slipped 0.2 percent at 9:55 a.m. in New York after posting three consecutive weeks of gains. Before Monday, the gauge had trimmed the 11 percent selloff that began on Aug. 17 to 3.3 percent. Bouffard said his firm took advantage of the recent declines to add holdings while staying neutral on stocks.
Payout growth is slowing to less than half the pace in the past five years as reductions spread from commodity producers to industrial companies. About $98 billion will be earmarked in the fourth quarter, according to Bloomberg Dividend Forecasts that are based on option prices, company guidance and industry trends. While that’s about 5 percent higher than a year ago, it trails the average rate of 12 percent since 2010.
Ten companies, including Transocean Ltd. and Sigma-Aldrich Corp., will trim payouts by year-end, adding to 12 reductions in the first nine months of 2015 that are already the most since 2009. Including some 80 increases expected in coming months, the total number of dividend boosts will reach 356 this year, down from 375 in 2014.
This year is poised to be the first since 2008 that companies spend more on dividends and buybacks than they take in through earnings. Should share repurchases remain steady from a year ago, companies in the S&P 500 will send $935 billion out the door to shareholders, compared with analyst forecasts for $914 billion in profits.
“It absolutely parallels a slowdown in earnings,” said Jim McDonald, the chief investment strategist at Chicago-based Northern Trust Corp., which oversees $946 billion. “It’s companies being prudent, preserving capital when future cash flow is uncertain.”
CEOs are already doing everything they can to keep shareholders happy amid the weakest economic recovery since World War II. The proportion of cash flow used for stock repurchases and dividends rose to about 50 percent in 2014 from less than 30 percent a decade ago while it slipped for capital investments, data compiled by Barclays Plc show.
At the same time, cracks are forming in corporate funding. The amount of money available from savings and cash flow trailed outlays for plants and equipment in the second quarter by the most in seven years, according to Federal Reserve data that tracks all non-financial U.S. corporations.
Stable returns have helped bolster stocks at a time when 10-year Treasury yields are stuck around 2 percent. At Friday’s close, the S&P 500’s dividend yield was 2.1 percent, presenting a premium that contrasts with the last 45 years, when the government debt offered rates averaging 3.7 percentage points higher.
While CEOs are reining in dividends partly because they prefer other cash uses like buybacks as a way to boost per-share earnings, the retreat won’t be enough to prompt investors to shun stocks, according to Daniel Genter of RNC Genter Capital Management.
“It’d be nice to grow faster, but is it going to be a reason to vacate a stock that’s yielding 5 percent to go into a Treasury bond that pays 2 percent?” said Genter, who oversees about $4.2 billion as chief executive officer at the Los Angeles-based firm. “The answer is no.”
Since 2009, companies in the S&P 500 have paid out $1.8 trillion in dividends, almost double the amount in the five-year bull market through 2007. Cash returns soared as earnings jumped to a record over the past 6 1/2 years, a period that coincided with a 200 percent increase in American stocks.
The S&P 500 Dividend Aristocrats index, which tracks companies that have raised payouts every year for at least 25 years, has outperformed, surging 300 percent. It’s down 0.5 percent on a total return basis in 2015 compared with a 0.4 percent gain in the S&P 500.
Investor appetite for dividend stocks is waning. They’ve pulled money from funds focusing on stocks with higher payouts in almost every week since mid-June, the worst stretch of outflows since 2008, data compiled by EPFR Global Inc. show.
“There is no doubt that if corporate cash flows start to be constrained or more constrained than they’ve been in the past, the rate of overall buybacks and dividends should slow,” Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, said by phone. The firm manages $6.2 billion. “I would expect the slowdown, at least in dividend growth, to continue going forward unless we move into a more significant expansion phase again.”