Good News from S&P: Dividend Increases Now Exceedingly Rare

Standard and Poors announced that dividend hikes fell to just 191 in the quarter ended September 30^th while 113 companies cut or eliminated their payouts.

Since 1955 every year saw more increases than reductions with the average ratio being 15:1 in favor of higher payouts. The chart below shows the details from the third quarter of the past two years.

S&P’s 7000 Company Universe	Q3 2008	Q3 2009
Dividend Increases	346	191
Dividend Cuts/Omissions	138	113
Increases/Reductions	2.51x	1.69x

Because dividend adjustments are a lagging indicator, periods with poor dividend fundamentals (like 2008-2009) are often great buying opportunities.

This counter-intuitive concept is similar to that used when buying cyclical stocks when their P/Es are high (due to depressed earnings at the bottom of economic cycles).

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Here’s a less than stellar commentary on the wisdom of corporate boards….

Standard & Poors report on corporate share buybacks indicates poor timing in the execution of these programs among S&P 500 companies.

Here are the past three years of data for S&P 500 company buybacks (Q3 2009 numbers are not yet available).

S&P 500 – Share Buybacks
Q3 – 2007 [near DJIA all-time high]	$172 billion [all-time high]
Q2- 2008	$87.9 billion
Q2 - 2009	$24.2 billion

When stocks were high buybacks were rampant. As shares got progressively cheaper in 2008 and 2009 buybacks slowed dramatically.

Corporate boards were just as bad in their market timing as most of the so-called emotional small investors who traditionally buy high and sell low.

Comments

[David Van K...:]

Thanks for the statistics. It's well known that corporate boards time share buybacks badly. It's almost inevitable. Share buyback programs are usually initiated when a company is flush with cash. They don't want to increase their dividend too much, because then they'd only have to lower it later. So they announce a share buyback program. The problem is, the reason the company is flush with cash is that business had been good lately, so their stock price has probably run up. Thus they buy high.

A couple years later, the business cycle turns, business is not so good, and they are not flush with cash. In fact they may be desparately trying to preserve cash. They don't want to cut the dividend, so they eliminate any share buyback program that exists.

They are not really trying to time the market. They are reacting to cash buildups and cash drawdowns. But the net result is that they often "buy high." IMO, share buybacks are rarely a good way for a corporation to use its profits. This is one of the big reasons.

Oct 12 07:46 AM

[Shishir Nigam:]

Share buybacks nearly always results in a loss in value for the shareholders. Cash in the firm is utilized to purchase stocks, which may provide temporary capital appreciation instead of solid cash dividends that cannot be taken back from shareholders like capital appreciation can.

Only time they can be useful is when the management is shrewd enough to know their stock is way under-valued and go into the market to use the opportunity to load up.

For more analysis, check out my blog: youngandinvested.com

Oct 12 09:50 AM