Record Profits are Highly Favorable to Dividend Policies
As income investors know, dividend-paying stocks have never been more popular or well-known. For some contrarian types, this is cause for concern. But as Stephen Leeb explains below, there are now more reasons than ever for companies to pay dividends: Apple (AAPL) is only the most high-profile of many stocks that have recently joined the dividend club. And as more companies continue to climb on the bandwagon, it will help the supply of dividend-payers to keep up with demand.
“While economic recovery in the U.S. has been slower than in any other post- recession period, the economy is indeed improving and companies’ profits are rising. Collectively, members of the S&P 500 are expected to generate record levels of profits in 2012. Consensus estimates put projected earnings for the index at more than $104 per share, a record. If they don’t disappoint (and this will continue the recent trend of corporate profits exceeding estimates for 12 quarters in a row) it will signify an almost 70% increase in profits for the index since the lows of 2009. Valuations, in the meantime, remain attractive: trading at 14 times year-ahead earnings, stocks are better priced today than they were even a year ago.
“This also translates into more cash in corporate coffers and the potential for further boosts to dividends. Stocks in the S&P 500 are expected to pay $275 billion in total dividends this year, beating the previous record of $248 billion set in 2008.
“Indeed, one way of proving that companies are feeling more comfortable about their future is to review recent dividend activity of major U.S. companies.
“Out of 500 companies in the index, only about one-fifth (representing 15.6% of the index’s total market value) do not currently pay any dividend. Both numbers are still below the 20-year average for the index; growth in corporate profits accounts for the increase in total dividends.
“And the trend shows further improvement here. In the first two months of this year, 100 companies have increased their dividends, two initiated dividends, and only two decreased their payouts in a meaningful way. None of our Income Performance recommendations are on this ‘shame list’ of dividend cutters.
“We expect more increases as the year progresses; there are only three reasonable uses for cash that any corporation has: acquisitions, buybacks and dividends. The practice of accumulating cash on the balance sheet is counterproductive; dividends are a great measure of earnings quality and corporate governance.”
Stephen Leeb, Leeb’s Income Performance Letter, April 2012
