Kiss Those Dividends Goodbye « naked capitalism

Wednesday, November 26, 2008

Kiss Those Dividends Goodbye

Some have argued that stocks are cheap because S&P dividend yields are higher than Treasury yields.

That presupposes dividend stay at present levels or increase. They are being cut, and with lousy to no profits in the offing, it’s reasonable to assume that in aggregate, dividend payments will continue to shrink. Right now, the cuts are concentrated in financial firms (why pay dividends when you are broke and can turn to the Treasury and Fed for a helping hand?). However, as the real economy starts to feel more of the effects of the slowdown, those companies will feel pressured to conserve cash by reducing dividends.

From Bloomberg:

Stock dividends are disappearing at the fastest rate in 50 years as the worsening recession forces U.S. companies to conserve cash.

Citigroup Inc., Genworth Financial Inc. and New York Times Co. are leading 91 companies listed on the biggest U.S. exchanges in reducing or suspending payouts to shareholders this month, the most since May 1958, when 113 companies slashed dividends, according to data compiled by Standard & Poor’s. The reductions in November exceeded the 81 dividend cuts in October and 60 in September.

“Until we start to see the economy turn around, you have to assume broadly that dividends could be at risk in many sectors of the economy, especially among financials,” said Fritz Meyer, the Denver-based senior market strategist at Invesco Aim Advisors Inc., which manages about $358 billion…

Financial companies accounted for six of the eight dividend cuts or suspensions in the S&P 500 this month through Nov. 24, based on data from S&P index analyst Howard Silverblatt….

Tumbling stock prices are also increasing the dividend yield for S&P 500 companies to the highest level in at least 15 years. The 3.8 percent yield, on a weekly basis, is greater than the 3.6 percent return from a 30-year U.S. Treasury.

Options prices, earnings growth and industry trends suggest that 83 companies may boost their dividend, according to data compiled by Bloomberg. 3M Co., Eli Lilly & Co. and Coca-Cola Co., each yielding more than 3.1 percent, have increased their payout for the past 25 years and likely will do so again, data from S&P and Bloomberg show….

“Companies feel like they have to conserve capital,” said Bill Stone, who oversees $56 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “If you’re out there raising a lot of capital, it doesn’t make a whole lot of sense to turn around and be paying it out.”

More on this topic (What's this?)

Stock Screen For Improving Dividends (Dividends Value, 11/20/08)

Measuring Dividend Stocks Investment Risk Profile (Dividends Value, 11/18/08)

Dividend Aristocrats are outperforming the markets in 2008 (Dividend Growth Investor, 10/22/08)

Read more on S&P 500 (SPX) at Wikinvest

12 Comments:

ndk says:

November 26, 2008 at 3:07 am

Equity, YOU are the butt of the capital structure. You’re the worst place to be during bad times, but the best place to be during good times.

I’ve always been stunned that common is promoted as the right investment vehicle for individual investors, over bonds, convertibles, or perpetual preferred. Might have something to do with that blowing up customers bit, I guess.

a says:

November 26, 2008 at 3:21 am

"S&P dividend yields are higher than Treasury yields."

Wasn't this true from the 1930s to the 1950s? Economists back then even provided a reason why it should be such: equity is riskier, so you need a higher yield in order to justify holding it. When the yields switched back in the 1950s, I vaguely remember hearing that Newsweek or some such did a story on it, citing it as a bad sign.

doc holiday says:

November 26, 2008 at 3:33 am

Dividends are universally dead meat! IMHO, the reason stocks are still highly overvalued is because of dividends that are out of line with fundamental future valuation. These days, I just look at the dividend as the percentage that the stock is over-valued.

As I continue watching the yield curve fall apart, I question how long it will be, before the 10-year Treasury falls below 3%, thus when I see any corporation with a div yield near or above 3%, alarm bells go off
A great recent example is a stock like Citi which has a crashing share price but a dividend that hangs in place, frozen and unchanging, as if Citi is a great future growth opportunity. The juxtaposition and inequitable disparity of the crashing market value and the illogical off-set of offering dividend bait is absurd to a point where it’s false and misleading touting. How can a company like C support and then sustain a dividend? Citi has EPS of negative $4.09 per share and they have to beg taxpayers for cash to keep the doors open, but they have a div yield of 10.80% — wow, I’m impressed and I wonder how many people will get a piece of that going forward. Going back to my theory, C, IMHO is overvalued by at least 11%. Don’t get me started on compensation and XMAS Bonus structures, or I’ll never shut up…

The solution to this dividend problem can be easily found by going back and doing some DD on WaMu, Indymac and a long list of stocks that have decreased EPS, decreasing earnings yields (the inverse of the P/E) high share prices and high div yields — which obviously are related to Treasury yields at zero.

Furthermore, this overvaluation of these assets is directly related to the probability of deflation, thus in this story here, to read that, “ Stock dividends are disappearing at the fastest rate in 50 years as the worsening recession forces U.S. companies to conserve cash” is no shock to me at all. The fact is, money is being destroyed and not replaced.

spare some change? says:

November 26, 2008 at 4:46 am

Cutting dividends isn’t necessarily a sign of weakness. During a credit crunch the last thing you want to be doing is paying out dividends to shareholders. You want to conserve that cash for acquisitions. The companies with cash will be the great whites in the sea of capitalism once their competitors are broke.

Anyway, buying equity is definitely a gamble in this environment but with prices the way they are, you can come out way ahead if you pick winners. Everybody investing for the long haul understands this, but everyone also has a different concept of what a winner is, so the rally just around the corner will lift everything. Don’t drink the kool aid, focus on value for your investing dollars, and you’ll get to share in the rewards. Isn’t that what capitalism is all about?

ndk says:

November 26, 2008 at 5:08 am

During a credit crunch the last thing you want to be doing is paying out dividends to shareholders. You want to conserve that cash for acquisitions.

As a corporation, you’re right. As an investor, that’s precisely when you do want the dividends, so you too can reinvest them cheaply. As a laid-off commenter here ruefully pointed out, dollar cost averaging when you only get paid and receive dividends during the good times is a real screwjob.

Anyway, buying equity is definitely a gamble in this environment but with prices the way they are, you can come out way ahead if you pick winners.

Just be careful. Every fundamental metric you’d use to value these securities must be treated as suspect in this environment, including dividend yield. If the worst should happen, you absorb all losses first.

If you feel bullish, you might apply your instincts to buying junk bonds or convertibles instead. They’re at record wides to Treasuries, and in the unlikely event of bankruptcy, you’re in a much better position.

JP says:

November 26, 2008 at 7:08 am

Some have argued that stocks are cheap because S&P dividend yields are higher than Treasury yields.

Likewise for the articles arguing that stocks are cheap because P/E is low: Invariably, no one is using realistic forward estimates for that earning denominator.

Andy says:

November 26, 2008 at 10:34 am

Taking a bit of a contrarian view, I do think that some dividend paying stocks are still worth considering. Just today I wrote a post of five high dividend stocks I like – T, KO, LLY, AEP and D – all solid companies with good dividend yields. Lets not write stocks like these off now. Infact for long term investors, I think now is the time to get in.

Anonymous says:

November 26, 2008 at 11:44 am

Some talk like this is normal market action. It might be normal action for a depression. Even if markets front run a recovery by 6 months to a year by bottoming before the consumer bottoms, you have a few years to go yet.

This time around, the markets are going to be injected (continued) with liquidity that will blow your mind. Share prices and markets should go up due to the prop job but the value of the dollar will wipe out any gains……This is called hyper-inflation. Not a bubble but pure lack of confidence in a currency.

Happens all the time. Past, present and future.

http://radio.goldseek.com/sinclairnuggetnov25.mp3

Tortoise says:

November 26, 2008 at 1:09 pm

The geniuses that administer our public companies have spent a lot of cash buying back company stock at the top of the bull market, only to sell stocks or cut dividends when prices are severely depressed.

ndk says:

November 26, 2008 at 1:39 pm

The geniuses that administer our public companies have spent a lot of cash buying back company stock at the top of the bull market, only to sell stocks or cut dividends when prices are severely depressed.

You’re right, Tortoise. I also worry about the deeper implications that corporations saw fit only to buy back stock during the best times, having seen no more useful way to spend or reinvest it. Was that a result of compensation structures, or a sign that trend growth in our economy has slowed badly?

doc holiday says:

November 26, 2008 at 2:27 pm

Pimco fund may delay payment of November dividend

The Pimco California Municipal Income Fund II said Wednesday it may be forced to delay the payment of its November dividend, as well as the declaration of its next scheduled dividend due to severe market disruptions.
http://biz.yahoo.com/ap/081126/ p…d_dividend.html

Anonymous says:

November 27, 2008 at 12:41 am

From 1871 to 1958, dividend yields were higher than bond yields; from 1958 to just recently, they were lower. See FT Alphaville and the article they cite.

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