Corporate cash piling up - but not dividends

Money managers steamed as businesses hoard greenbacks

Oct 9, 2011 @ 12:01 am

By Bloomberg News

Pressure is building for higher dividends as U.S. companies from Google Inc. Ticker:(GOOG) to Valero Energy Corp. Ticker:(VLO) sit on record cash stockpiles, and payouts remain at three-year lows.

S&P 500 companies paid 27% of earnings in dividends in the second quarter, down from 30% in 2008 and below a 30-year average of 41%, according to Wells Fargo & Co. The amount held in company cash, equivalents and short-term marketable securities jumped 63% to $2.77 trillion in the same period, according to Bloomberg data.

“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.”

Investors gave dividends less importance as stocks soared during the middle of the last decade, said Gina Martin Adams, a Wells Fargo equity strategist. Now, however, investors want companies to pay out more of the cash they are holding to make up for low equity returns in the past year, said Keith Wirtz, who helps manage $16.7 billion as chief investment officer at Fifth Third Asset Management Inc.

The S&P 500's ratio of net debt to earnings before interest, taxes, depreciation and amortization has dropped to 2.6, from 5 in mid-2008, data compiled by Bloomberg show. Analysts surveyed by Bloomberg project that this year's earnings will increase 18% to about $100 a share.


“Why are they sitting on all this cash, earning close to zero, when they could at least be putting it in the hands of shareholders?” said Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust Co.

Companies are harboring cash because the economic and political outlook remains cloudy, said David Sowerby, a fund manager with Loomis Sayles & Co., which manages $150 billion. He said that before dividends are increased, companies that view their stock as cheap should buy back shares.

The cash also would come in handy for acquisitions in markets with slow organic growth, said Dan Veru, chief investment officer at Palisade Capital Management LLC, which manages $3.4 billion. Companies would have to use cash instead of shares because of depressed equity values, he said.

“We're going to be faced for some time with a slow environment for organic-type growth,” he said.

General Electric Co. Ticker:(GE), CBS Corp. Ticker:(CBS) and Citigroup Inc. Ticker:(C) were among companies that cut dividends during the recession, during which global financial industry losses and write-downs from the credit crisis surpassed $1 trillion. Shareholder payouts haven't returned to pre-recession levels.

GE in 2009 lowered its quarterly dividend for the first time since 1938 to 10 cents a share, from 31 cents. The world's biggest provider of power generation equipment and services has increased the payment three times since to 15 cents, and chief executive Jeffrey Immelt has told investors that raising the dividend and accelerating share repurchases will take priority over large acquisitions in the near term.

Cash and short-term investments held at GE rose to $136 billion at the end of the second quarter, from $89 billion in the first quarter of 2009.

CBS, owner of the most watched U.S. television network, trimmed its dividend 81% in 2009 to 5 cents, from 27 cents. The broadcaster bought back stock and lifted the payout this year to 10 cents after trimming debt and improving profit margins. Its store of cash and near-cash items has risen to $1.3 billion in the latest reported quarter, from $239 million at the beginning of 2009.

Valero, the largest independent U.S. crude-oil refiner, has more than doubled its cash holdings since 2009 to $4.1 billion. The company cut its 15 cent dividend in 2010 to 5 cents, where it remains today.

“Distribution of dividends and other forms of income streams will become even more important over the balance of this decade in contribution of total return,” Mr. Wirtz said of companies in general. “That's very much on our mind.”

Companies are earning almost nothing by sitting on cash at a time when the stock market may be entering another lost decade similar to the 1970s, Mr. Mullaney said. They should be a “bit more generous with their payouts,” he said.


The S&P 500 dropped 17% in the five-year period ended last Wednesday. In the 1970s, the index had an average annual return of 2.4%, but this year, it has tumbled 11% and is down 18% from a 52-week closing high April 29.

With an outlook of low growth for stocks over the next few years, the time for higher dividends has arrived, said Barry James, president of James Investment Research Inc., which manages $2.5 billion of securities. James favors companies such as drug maker Eli Lilly & Co. Ticker:(LLY), which has a dividend yield of about 5.3%.

A more aggressive dividend policy would help attract investors, who are migrating from fixed income back to equities, Mr. Mullaney said.

“That's one way companies can differentiate themselves, as far as being better total-return prospects, if they do pay up more in dividends during rough times,” he said.

The S&P 500's dividend yield was 2.31% as of last Wednesday, the most since November 2009, according to data compiled by Bloomberg. The rate is higher than the yield on 10-year Treasuries — only the second period since the 1950s in which that was the case. Dividends topped U.S. government bonds in 2008 and 2009, after Lehman Brothers Holdings Inc.'s bankruptcy spurred the worst financial crisis since the Great Depression.

At least 60 companies in the S&P 500 are likely to raise their dividends, including Wal-Mart Stores Inc. Ticker:(WMT), Walt Disney Co. Ticker:(DIS) and Nike Inc. (NKE), according to a Bloomberg analysis of seven criteria, including company guidance, dividend history, regression analysis and put-call parity.

Companies such as CVS Caremark Corp. Ticker:(CVS) and Intel Corp. Ticker:(INTC) have turned to share buybacks, giving each remaining share a bigger slice of earnings.

S&P 500 companies were paying out about 1.92% of their stock price in dividends at the end of the second quarter. When the value of share repurchases is added in, the stock yield jumped to 4.88%, according to data from Standard & Poor's. That's up from 3.4% in the first quarter of 2010 and down from about 7.5% at the end of 2008.


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