Dividends at U.S. companies are at three-year lows though many are sitting on record cash stockpiles. During the second quarter, S&P 500 (NYSE:SPY) companies paid 27% of earnings in dividends, down from 30% in 2008 and well below a 30-year average of 41%. In that same time, company cash, equivalents, and short-term marketable securities climbed 63% to $2.77 trillion.
“Companies are hoarding a lot of cash and they’re getting a very low return for it,” said Richard Sichel, chief investment officer at Philadelphia Trust Co., which manages $1.6 billion. “That’s all the more reason for them to pay bigger dividends.”
When stock prices were soaring during the middle of the last decade, investors were less concerned with dividend, but now they want companies to pay out more of the cash they are holding to make up for low equity returns over the past year, said Keith Wirtz, who helps manage $16.7 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati.
Before interest, taxes, depreciation, and amortization, the S&P 500’s ratio of net debt to earnings is down from 5% in mid-2008 to just 2.6%, while earnings are expected to increase 18% this year to about $100 a share.
Companies are hoarding cash because the economic and political outlook remains tempestuous, and before they increase dividends, companies that see their stock as cheap should buy back more shares with all that extra cash, says David Sowerby, a fund manager with Loomis Sayles & Co. in Bloomfield Hills, Michigan.
The cash could also be used for acquisitions in markets with slow organic growth, said Dan Veru, chief investment officer at Palisade Capital Management LLC, which manages $3.4 billion. Because of depressed equity values, companies would have to use cash rather than shares for acquisitions. “We’re going to be faced for some time with a slow environment for organic-type growth,” said Veru.
General Electric (NYSE:GE), CBS Corp. (NYSE:CBS), and Valero Energy (NYSE:VLO) are among the companies that cut dividends during the recession and have yet to increase shareholder payouts back to pre-recession levels.
In 2009, GE lowered its quarterly dividend for the first time since 1938, from 31 cents a share to just 10 cents a share. Since then, it has increased the payment three times to 15 cents a share. Cash and short-term investments at GE rose to $136 billion by the end of the second quarter of 2011, up from $89 billion in the first quarter of 2009. Chief Executive Officer Jeffrey Immelt has told investors that raising the dividend and accelerating share repurchases will be priorities over making large acquisitions, at least in the “near term.”
CBS cut its dividend from 27 cents to 5 cents in 2009. This year, CBS bought back stock and increased its dividend payout to 10 cents a share. Meanwhile, cash and near cash items had grown to $1.3 billion as of the company’s most recent quarterly report, up from $239 million at the beginning of 2009.
Valero, the nation’s largest independent crude refiner, has more than doubled its cash holdings since 2009 to $4.1 billion, while cutting its dividend from 15 cents to just 5 cents in 2010, a level at which it remains today.
Companies should be a “bit more generous with their payouts,” said Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust Co. in Boston, as they are earning almost nothing by sitting on their cash as the market continues its downward spiral. The S&P 500 is down 17% over the last five years — down 11% this year alone, and down 18% from a 52-week closing high reached on April 29. A more aggressive dividend policy would help attract investors who have been leaving equities for fixed income, said Mullaney. It would also allow companies to differentiate themselves with better total-return prospects.
At least 60 companies on the S&P 500 are likely to take Mulllaney’s advice, including Wal-Mart (NYSE:WMT), Walt Disney (NYSE:DIS), and Nike (NYSE:NKE). Companies like CVS Caremark Corp. (NYSE:CVS) and Intel (NASDAQ:INTC) have been turning to share buybacks, which give remaining shareholders a larger slice of earnings. S&P companies were paying roughly 1.92% of their stock price in dividends at the end of the second quarter, but when the value of share repurchases is added in, the stock yield jumped to 4.88%, still below the 7.5% at the end of 2008, but up from 3.4% in the first quarter of 2010.
But many banks are still holding out. Citigroup (NYSE:C), which received the largest taxpayer-funded bailout, was paying a $5.40 quarterly dividend in 2007, trimming that number in 2008 before eliminating the dividend payment altogether in 2009. In June of this year, it reinstated its dividend at just 1 cent a share, the equivalent of a 0.08% annualized dividend yield, one of lower on the S&P 500. JPMorgan (NYSE:JPM), which had the largest cash holdings of any S&P 500 company with $414 billion, raised its quarterly dividend from 5 cents to 25 cents a share, still less than its 38 cents-a-share dividend paid at the beginning of 2009.
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Technology companies have also been slow to increase dividend payments. Apple (NASDAQ:AAPL) has a $28 billion cash stockpile, while Google (NASDAQ:GOOG) has increased its stockpile from $16 billion in 2008 to $39 billion today, but neither pays dividends. Dell (NASDAQ:DELL), which had the 13th-highest cash-to-assets ratio of S&P 500 companies at midyear, with about $1 of cash for ever $3 assets on its balance sheet, also pays no dividend. Caterpillar (NYSE:CAT) has about half the ratio of Dell, and pays a dividend of 46 cents. Hewlett-Packard (NYSE:HPQ) increased its dividend to 12 cents a share this year. Microsoft (NASDAQ:MSFT), with $52.8 billion in cash at the end of June, making it the largest holder of cash among non-financial S&P 500 companies, boosted its quarterly dividend 25% to 20 cents a share earlier this year.