- Company insiders probably have the best view of their firm's prospects.
- In today's environment, it's fair to argue that any company raising dividends is confident in its future prospects and its ability to pay those dividends.
- So far, April has been corporate America's most tumultuous months ever. Yet, these large US companies raised their dividends.
Imagine you ran a company that paid regular dividends to shareholders. If you were deeply worried about the future of your company, would you increase your dividend?
The obvious answer is 'no'.
Any executive deeply worried about the future is also concerned about their company's ability to continue paying the dividend. So it totally defies logic to increase dividend payments in those circumstances.
In contrast, any company leader willing to raise dividends in the current economic storm is likely confident in the relative stability and predictability of their company's earnings and cash flows. This implies confidence in the company's overall prospects and ability to generate sales into the future. Indirectly, it also suggests confidence in the company's capital structure and ability to satisfy its debt obligations. In this way, some theorize that company management teams use dividend changes as a signaling mechanism to the market.
This got me wondering:
Which companies have actually raised dividends over the past month, while knowing that Q2 GDP is likely to decline by 30-40% on an annualized basis and unemployment approaches 20%?
I believe any company raising dividends in this economic environment is worthy of further investigation. Below I've provided an overview of US companies with a market cap of $10b+ that announced dividend increases during April 2020:
|April 2020 Dividend Increase Announcements|
|American Water Works||(AWK)||$0.50||$0.55||1.80%|
|Cheniere Energy Partners||(CQP)||$0.63||$0.64||7.60%|
|First Republic Bank||(FRC)||$0.19||$0.20||0.86%|
|Procter & Gamble||(PG)||$0.75||$0.79||2.61%|
|Johnson & Johnson||(JNJ)||$0.95||$1.01||2.89%|
Data source: Marketbeat.com
While the confidence to raise dividends at all in today's environment is telling, I believe additional information can be ascertained by the degree of change. Of the companies that announced dividend increases in April, only a handful announced increases of 5% or greater. These companies include Apple, American Water Works, Kinder Morgan, Newmont Goldcorp, Costco, First Republic Bank, Proctor & Gamble and Johnson & Johnson.
|Increase %||3yr Dividend Growth||Trailing Payout Ratio|
|American Water Works||10.00%||7.28%||55.40%|
|First Republic Bank||5.26%||6.09%||15.38%|
|Proctor & Gamble||6.01%||4.92%||69.91%|
|Johnson & Johnson||6.32%||6.76%||43.78%|
Data Source: Marketbeat.com
If the mission is to search for sustainable yield, I would eliminate Kinder Morgan and Newmont Goldcorp from the list. Not because they aren't good businesses, but because these businesses are dependent on an underlying commodity, oil/gas and gold respectively.
This is not to say I have a bearish view on oil or gold. (In fact, long term I'm quite bullish on both.) However, I believe dependence on a narrow set of underlying fundamentals is an unnecessary risk for anyone seeking a sustainable dividend. A significant portion of an oil/gas or gold company's success (i.e. its ability to pay a dividend) is dependent on a single variable totally out of its control. If you must include commodity-oriented dividend payers, just ensure you're appropriately diversified across sectors.
I believe the remaining companies - Apple, American Water Works, Costco, First Republic Bank, P&G and J&J - all have reasonable control over their destinies. They have pricing power by way of branding and an economic moat.
Not all companies are equal - and a dividend raise doesn't necessarily guarantee a bright future. However, I believe the signal these dividends send - especially in today's environment - adds a layer of support for an investing thesis. It demonstrates that insiders - company management - have confidence in the future prospects of the business and its ability to pay dividends.
While I believe investors shouldn't invest in a company on this information alone, during an economic crisis it is a strong indication that these companies are probably not experiencing existential risk.
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