Investors Appear Less Enamored with Dividend Paying Companies

If there is any truth to the adage: “It’s not what you know, but who you know”; then you might consider a slight variation on that theme: “It’s not who you are but who you follow”. Jeffrey Immelt stands as testament to this second phrase as coming to the helm of luxury liner General Electric (GE) after Capt. “Neutron” Jack was never expected to be an easy voyage.

Investors on the good ship GE, enjoying quarter after quarter of Jack’s “perfectly groomed” earnings, were lulled into complacency like those lying on the sun deck of a Caribbean cruise. Unfortunately, it wasn’t long after poor Jeffrey grabbed the wheel that hurricane season started.

If there is another old saw to be considered here it’s probably: “timing is everything in life” and due to factors way beyond his control Mr. Immelt’s timing in taking the helm could not have been worse.

JI's most recent misstep was guaranteeing the safety of the dividend earlier this year and then cutting it by 68% in late February. Implied volatility on GE has closed as high as 149.5268 since its 97.5067 close on February 26th. CDS spreads have also widened during this time moving from 660bps on the benchmark 5-yr on 2/26/2009 to a new all-time high of 1037.21 last Thursday. For some perspective, realize that in the heady days before August 2007, CDS spreads on Junk were as low as 300bp.

Given the tumult in the world, the question becomes not whether Jeff is as good as Jack but whether he is navigating the sea of tsunamis well enough to get the ship and all its passengers back to port. (Read keep the AAA rating.)

On the dividend front it is safe to say GE is not alone. JPMorgan Chase (JPM), Dow Chemical (DOW), Motorola (MOT), Pfizer (PFE), Textron (TXT), CBS (CBS) and the New York Times Co. (NYT) have all cut dividends recently (apologies if I left anyone out). Howard Silverblatt, an analyst with S&P said recently that dividend payments among companies in the S&P 500 were down 24% from a year ago. Howard went on to say that this year's projection for dividend cuts would be 23% which would make it the worst two year span for dividends since 1938.

One of the factors leading up to these cuts, HS believes, is that the market has grown less inclined to punish dividend reductions. “They are not as painful as they were a year ago” he was quoted as saying. (Someone please tell that to Mr. Immelt.)

While investors may not be punishing the “cutters” as harshly, they seem even less enamored with the names that pay dividends as a whole. Nicholas Bohnsack of Strategas Research Partners, a New York research firm, recently found that since November 21, 2008 dividend paying stocks have underperformed their non-paying brethren. "In an environment where there is a massive flight to quality, you would expect companies that are offering to do better. That has absolutely not been the case,” Mr. Bohnsack said recently. He goes on to reason that the price declines of the dividend paying stocks reflect the market’s perception of the eventual need for those companies to lower payouts in order to conserve cash flow and bolster the balance sheet. “It is almost the purest read on confidence that we have.”

If that is true it might be pure but it doesn’t seem all that confident.

Enjoy the week.

Comments

[Dave Wrixon:]

That is because most rational investors are expecting most dividends to be cut and a substantial number wiped out. There are no dividends from Chapter 11.

Mar 13 07:55 AM

[David Van K...:]

I don't think "most" dividends will be cut. There are a lot of high-profile cuts being announced, and they are impacting the across-the-board numbers from S&P. Yes, overall dividends will be down. Several prominent banks (and other financially entangled companies, like GE) are making deep cuts, and others will hold their dividends steady, bringing the S&P's indicated dividend payout down.

But other companies are following their usual patterns of increasing dividends. Increases already announced in 2009 include Abbott Labs, Alliant Energy, AT&T, Chubb, Coca-Cola, Kinder Morgan Energy Partners, Sherwin-Williams, Sunoco Logistics, and 3M.

Undoubtedly some companies will increase their dividends this year, but not as much as usual. It will be a difficult year for dividends. But it will not be a wipe-out.

Mar 13 11:22 AM

[henarl:]

One wonders if Obama is a talented enough mariner to take over the ship of state in the midst of a hurricane, especially with Geithner as his chosen first mate. Doubts have already started to set and one also wonders if there are enough lifeboats to save the passengers.

Mar 13 12:37 PM

[2houndz:]

It's not that most dividends WILL be cut, but nearly any dividend COULD be cut. All it takes to pummel a company's price is guilt by association.
It is difficult to find any fundamental analysis that works in this market.

Mar 13 02:19 PM

[samwise:]

Mr. Wrixon is right on. The smart companies are slashing their dividends to conserve precious cash and what happened with GE is very instructive. Shows the guy in charge didn't know what was going on with his business let alone the economy. He should be fired once the near bankruptcy has been averted and that will result in a further rise in the stock price. There are many more GE's out there, though--run by people blindly holding on to their dividends and in so doing plunging their corportations into the abyss (utilities come to mind but so do the many "defensive plays" the "smart money" is blindly pouring money into like medical device mfg's.) Should we come roaring out of this recession there will be no cash on hand to expand either which means you could wreck your business "in the good times" too, espicially given this amazingly inflationary budget just rammed through Congress and Senate with much more on the way. Bottom line: the Gold Standard is still Exxon Mobil which has never paid a high dividend and needless to say has never had any issues with profitability when the economy does well.

Mar 13 04:26 PM

[mkreisel:]

Dividends or not, a company's expected future cash flow matters the most.

Mar 13 04:57 PM

[mediapro:]

The "doubts that have already started to set" are from naysayers who lost the last election.

Take a peek back at the past Captain and First Mate(s). The Captain was off the ship and on his ranch most of the time, taking more vacation time than any President in history and notoriously asleep by 9 PM. One mate wrote a book exposing early the machinations happening in the looney bin and the other wrote a three-page "plan" too late to make any difference.

I'll give these guys a little bit more slack before I join the crybabies on the right to tighten the noose. At least this Captain can string two sentences together without sounding like an idiot.


On Mar 13 12:37 PM henarl wrote:

> One wonders if Obama is a talented enough mariner to take over the
> ship of state in the midst of a hurricane, especially with Geithner
> as his chosen first mate. Doubts have already started to set and
> one also wonders if there are enough lifeboats to save the passengers.

Mar 13 05:04 PM

[Steve Ward:]

We need more happy talk from Obama. More the better. that'l keep the dividends up--before bankruptcy.

Mar 13 07:34 PM

[Football Geek:]

While I have not sold my many dividend payers in this bear
market because they are below my average price, and other
than the big banks they will return sometime to decent
levels when this down turn is over. On the other hand,
I'm rewarding the companies that have not cut their
dividend by putting new money in their shares. A few
come to mind that will reward investors over many years.
KO, JNJ, PG, WMT, TRI, THI, etc. will share the cash with
shareowners.

Mar 14 10:30 AM

[Chezfrederick:]

In addition to rewarding shareholders, dividends also signal to the market the shape of the company and its' management confidence in it's performance looking forward. Cutting dividends is a signal of trouble. This assumes a responsible business and management.

I automatically sell any position in companies that cut or likely to cut dividends, and keep those that demonstrate the self confidence in their future.

Let's hope that the cutting trend does not become a fashion statement with a lemming mentality.

Mar 14 01:44 PM

[mkreisel:]

If I buy dividend paying stocks in the current environment, I'm putting a lot more stringent criteria beside looking at yields, payout ratios, and last 5-10 years operating performance.

My criteria or rather questions are:
1. Are people/businesses willing to pay for the company's products/services even under severe economic distress?

2. Is the company a leader (in terms of size, ROCE, margins) in its industry? Is the company gaining on its competition?

3. Does the company employ lots of leverage? Depending on distressed capital markets for dividends is a big no-no.

4. Is the government causing troubles within the company's industry? Could governments, in search for extra incomes and agendas, greatly increase taxes, price controls, or regulations?

5. When the recession is finally over, will the company have increased its competitive position and go on to new glories?

Mar 14 05:51 PM

[Graybeard44:]

If all my stocks had performed as well over the past 15 years as my 3M shares, I'd be thrilled. The fact that I just got a 2% raise in my 3M dividend income is truly the mark of a great company with great management.

Mar 16 12:09 PM