Dividends Take to the Comeback Trail.By PETER A. MCKAY
In the tumult of the last two years, dividends have been all but forgotten. Now they are starting to make a comeback.
So far this year, companies in the Standard & Poor's 500-stock index have announced $4.4 billion in combined net dividend increases, the best figure since the fourth quarter of 2007. Last year's first quarter was the worst in recorded history, with companies announcing $38.7 billion in dividend cuts, according to S&P data.
.The recent announcements of increased payments come as corporate balance sheets are flush with cash—a record $832.4 billion at non-financial companies in the S&P 500 at year's end, up by more than a third since 2008.
Hunting for dividend payers traditionally has been considered a game only for the cautious. It has largely been out of favor during the market's rebound from the bear-market lows set last March. The Dow Jones Industrial Average is up 64% over that period, including gains in 10 of the last 12 sessions. Before suffering a slight pullback Friday to 10741.98, the Dow rallied last week to its highest close since October 2008.
The gains have been largely driven by smaller stocks, those considered higher-risk or likely to be acquired. Such companies generally aren't dividend payers. In contrast, the large market stalwarts that tend to make regular quarterly payouts have been largely snubbed during the comeback.
Now that corporate profits are recovering, though, it is inevitable that investors will take a harder look at what companies are doing with their newfound riches, traders and analysts say. Shareholders are likely to demand at least some of the rising earnings be put directly into their hands.
"I think we're getting into a period of perhaps a half a decade or so where investors will be looking for more yield wherever they can get it," says David Prokupek, chief investment officer at portfolio-management firm Consumer Capital Partners in Denver. "Dividends definitely fit into that theme, especially since you're just starting to see them come back along with some of these other things."
Mr. Prokupek says his firm has been buying dividend payers like AT&T and Verizon this year as a play on increased corporate payouts, since each boasts a dividend yields above 6%. He also is betting on several exchange-traded funds tracking the utilities sector, which historically offers a steady dividend stream.
One encouraging sign: Last week, General Electric's chief financial officer said that the conglomerate might begin raising its dividend again in 2011. The news, which came a little more than a year after GE announced its first dividend cut since 1938, helped drive up GE shares by 6% for the week.
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So far this year, companies in the Standard & Poor's 500-stock index have announced $4.4 billion in combined net dividend increases, the best figure since the fourth quarter of 2007. Above, Richard Newman of Barclays Capital on the floor of the New York Stock Exchange last week.
.To be sure, total dividend payments are still relatively low compared to a year ago, since many companies' earlier cutbacks are still in effect. Actual payouts in the first quarter are projected to decline about 16% from a year earlier, according to S&P data. But analysts say hints of increases to come—just like GE's reassuring comments last week—suggest that the pendulum is swinging in the right direction for dividend-starved investors.
S&P analyst Howard Silverblatt says he expects a surge in dividend increases in the third quarter as the economy improves. In all, 2010 will probably see a 5.6% increase in dividend payments among S&P 500 companies, Mr. Silverblatt estimates. That would be a big reversal from 2009's record decline of $52 billion in dividends, or 21%, to $196 billion.
In the current quarter, 77 companies in the S&P 500 have announced dividend increases, compared with just two that cut their payouts, according to S&P. Valero slashed its dividend by 75%, and Tesoro suspended its dividend altogether. Both companies are refiners that have been squeezed by higher oil prices and weak demand for finished fuels.
The fuel behind increased dividends comes from the recent rebound in corporate profits, which in turn are being helped by greater efficiencies that companies instituted during the worst days of the financial crisis.
S&P 500 companies tripled their per-share earnings in the fourth quarter compared with the same period a year ago, near the worst of the financial crisis. For the first quarter ending March 31, S&P 500 companies are expected to report a combined 36% rise in per-share profit, according to Thomson Reuters. Revenue is expected to rise about 10%.
After the massive cost-cutting by corporate America, many traders expect the market will enjoy solid "earnings leverage," or outsized benefits from any uptick in sales, which should go straight to the bottom line. For now, analysts surveyed by Thomson Reuters are calling for overall S&P 500 profits to surge by about 20% to 35% every quarter this year, aided by growth of 6% to 10% in sales each quarter. Those forecasts are subject to big revisions.
Still, analysts and money managers warn of pitfalls that could disrupt a dividend bonanza. Mr. Prokupek points to the health-care legislation taking shape in Washington, which likely will raise taxes on dividends but keep their advantage over interest payments.
Michael Thompson, a managing director at S&P, says he is skeptical that dividend yields, or payments relative to share prices, are sufficiently out of whack with bond yields to encourage executives to compete for investor attention by raising their payouts.
The S&P's dividend yield, based on total payments in 2009, was about 2%, while the benchmark Treasury note now stands at 3.693%. But if profits grow as fast as Wall Street expects during the next few quarters, the gap could close quickly, especially now that the Federal Reserve has pledged not to raise interest rates anytime soon.
"There's no question a lot of the big guys are increasing dividends right now," says Mr. Thompson. "But I also think it's true that if they see something else that will make a good use for their cash, especially M&A, they'll go after that."
Perhaps the biggest question hanging over dividends: When will financial companies rev them back up? The crisis led to huge cuts, and regulators are reluctant to allow increases given the pile of bad loans still haunting most banks.
Bank of America Chief Executive Brian Moynihan recently said the giant bank remains cautious even though the worst of the crisis is receding, hardly an encouraging sign about dividends. In February, J.P. Morgan Chase James Dimon said the bank won't raise its dividend until it is sure the business environment has improved.
Mr. Silverblatt thinks increases in dividends by banks could be several quarters away. Even then, per-share dividend payments are likely to be smaller than they were before the crisis at banks that issued piles of shares to help repay U.S. government aid.