财经观察 1789 --- Dividends Falling Most Since 55

Dividends Falling Most Since ’55 Means S&P 500 Still Expensive

By Michael Tsang
     Feb. 23 (Bloomberg) -- The fastest reduction in U.S.
dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.
     U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.
     A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.
     “It’s a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price,” said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $134 billion. “Dividends have been a cushion in bad times. If they go to zero it’s a disaster.”
     Twenty-five companies in the S&P 500 saved almost $17 billion by cutting or suspending outlays this year, more than all the reductions from 2003 to 2007, when the index returned 83 percent. On a per-share basis, S&P 500 companies may trim payouts
13 percent this year, the biggest drop since 1942, S&P data show.

                          New York Times

     New York Times Co., the third-largest U.S. newspaper publisher, suspended its 6-cent dividend after making steady payments since going public 40 years ago, to lower debt. Midland, Michigan-based Dow Chemical Co., the biggest U.S. chemical maker, cut payouts for the first time since 1912. Milwaukee-based Harley-Davidson Inc., the motorcycle maker, reduced its dividend 70 percent, ending a string of increases dating to at least 1993.
     The same model that signals the S&P 500 is too high shows some companies that maintained dividends are cheap after more than $1 trillion in losses and writedowns at the world’s biggest financial institutions sent the U.S., Europe and Japan into the first simultaneous recessions since World War II.
     McDonald’s Corp., the world’s biggest restaurant chain, Procter & Gamble Co., the largest consumer products maker, and eight other S&P 500 companies are the most attractive because they have cash to raise payouts, data compiled by Bloomberg show.

                           ‘More Teeth’

     Dividends are “the single best tool to understanding a company,” said Matthew McCormick, a money manager at Cincinnati- based Bahl & Gaynor Investment Counsel Inc., which oversees $2.5 billion and owns shares of McDonald’s and P&G. “There’s a lot more teeth to a dividend.”
     Without dividends, investing in equities may not be worth the risk. Dividend income accounted for about 70 percent of average U.S. equity returns since 1900 after inflation, according to Elroy Dimson, Paul Marsh and Mike Staunton at the London Business School, in a study published by Zurich-based Credit Suisse this month.
     Investors who put $1 in U.S. stocks at the start of the century were paid back $582 with reinvested dividends, adjusted for inflation, the study showed. Price increases alone would have given an investor just $6 after that span, less than the $9.90 from holding long-term government debt, according to the study.
     “Ultimately, what you get out of investing in stocks is the cash flow from dividends,” said Laurence Booth, finance professor at University of Toronto’s Rotman School of Management and a colleague of Myron J. Gordon, who developed the constant growth version of the so-called dividend discount model in 1959.

                      Discounting Dividends

     The measure, which values a stock as the sum of all its future dividends, shows equities are still overpriced. With S&P 500 companies projected to pay a combined $25.27 in dividends this year, the index would need to fall to 526.46 before investors are compensated for owning shares.
     The analysis assumes investors expect total returns of 6 percent annually from stocks, including a 1.2 percent increase in dividends, which is the historical average since 1900, adjusted for inflation, according to data from the London Business School.
     The S&P 500 closed last week at 770.05, after dropping 15 percent so far this year and 38 percent in 2008. Treasury notes and bonds of all maturities returned 14 percent last year, according to data compiled by Merrill Lynch & Co.
     “Bearing in mind the higher risk, equities obviously become less attractive if the dividend decreases,” said Jörg Boysen, who manages a global equities fund at Frankfurt-based Union Investment, which oversees $182 billion.

                            Cash Kings

     Companies raising payouts may become more valuable. Oak Brook, Illinois-based McDonald’s, which returned 8.6 percent during the worst year for U.S. stocks since 1937, is undervalued by 46 percent from last week’s closing price of $54.57, according to a dividend discount model that adjusts for earnings and dividend growth over time.
     The company, which boosted its payout every year since 1976, is set to pay $2.17 a share in 2009. That represents an increase of 34 percent from $1.625 last year, according to data compiled by Bloomberg. Spokeswoman Heidi Barker declined to comment on the future of the company’s dividend policy.
     P&G, located in Cincinnati, is worth 42 percent more than its market price of $50.25, according to the measure. Analysts estimate the company, which makes everything from Tide laundry detergent to Charmin toilet paper and has increased its dividend for 52 consecutive years, will give investors $1.625 a share this fiscal year, a 12 percent increase from a year ago.
     “We’re confident we can sustain strong dividends,” P&G Chief Executive Officer A.G. Lafley said at an analyst conference in Boca Raton, Florida on Feb. 19.

                          Market History

     During the first half of the 20th century, dividend income made up all of the 5.3 percent return U.S. stocks delivered to investors, data compiled by the London Business School show.
     At the time, companies paid out most of their earnings to shareholders, compelled by a Treasury Department rule that established penalties for “improper accumulation” of income, according to the sixth edition of Benjamin Graham and David L.
Dodd’s “Security Analysis.” The book laid out the principles of value investing followed by billionaire Warren Buffett, the chief executive officer of Berkshire Hathaway Inc. and the world’s most successful investor.
     “The prime purpose of a business corporation is to pay dividends to its owners,” Graham and Dodd wrote.
     Between 1980 and 2000, investors increasingly sought price gains as dividends contributed 25 percent of returns. The shift occurred as companies such as Cisco Systems Inc. and WorldCom Inc. increased profits by using excess cash for expansion and acquisitions. In the five-year bull market that ended in 2007, cash to shareholders as a percentage of earnings fell to a record low of 31 percent, based on data compiled by Yale University professor Robert Shiller, as profit growth juiced by borrowed money outstripped dividend increases.
     Returning money to shareholders prevents managers from wasting it on investments that may not prove profitable, according to Bahl & Gaynor’s McCormick.
     “It forces companies from empire building, stupid acquisitions and nefarious activities,” he said. “You can’t fake the cash.”

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Undervalued S&P Companies Based on Dividend Discount Model

(The following non-financial companies raised annual cash payouts to shareholders every year this decade; are projected to have higher dividends this year and next; will report an increase in earnings per share in 2009; and are undervalued by more than 20 percent from their closing price last week based on the Bloomberg dividend discount model.)

Company                       ‘09E DPS  ‘08 DPS   DDM Pct. Chg

BCR  C.R. Bard                $0.64     $0.62     +59.08%
BDX  Becton, Dickinson        $1.30     $1.14     +54.32%
MCD  McDonald’s               $2.17     $1.63     +46.11%
PG   Procter & Gamble         $1.63     $1.45     +41.94%
ABT  Abbott Labs              $1.57     $1.44     +39.81%
MDT  Medtronic                $0.67     $0.50     +37.36%
GD   General Dynamics         $1.44     $1.40     +34.81%
MKC  McCormick                $0.96     $0.88     +34.70%
PEP  PepsiCo                  $1.84     $1.65     +28.02%
KO   Coca-Cola                $1.65     $1.52     +27.00%

S&P 500 Companies Cutting or Suspending Dividends This Year

Company                       New DPS   Old DPS   USD Change

AEE  Ameren                   $1.54     $2.54     -$211 MLN
AIV  Apartment Investment     $1.00     $2.40     -$124 MLN
BAC  Bank of America          $0.04     $1.28   -$6.222 BLN
CBS  CBS                      $0.20     $1.08     -$547 MLN
CIT  CIT Group                $0.08     $0.40      -$91 MLN
CMA  Comerica                 $0.20     $1.32     -$169 MLN
CEG  Constellation Energy     $0.96     $1.91     -$170 MLN
DOW  Dow Chemical             $0.60     $1.68     -$998 MLN
HOG  Harley-Davidson          $0.40     $1.32     -$215 MLN
HIG  Hartford Financial       $0.20     $1.28     -$351 MLN
HST  Host Hotels & Resorts    $0.00     $0.20     -$105 MLN
HBAN Huntington Bancshares    $0.04     $0.53     -$179 MLN
JNY  Jones Apparel            $0.20     $0.56      -$31 MLN
M    Macy’s                   $0.20     $0.53     -$139 MLN
MI   Marshall & Ilsley        $0.04     $1.28     -$323 MLN
MAS  Masco                    $0.04     $1.28     -$323 MLN
MOT  Motorola                 $0.00     $0.20     -$453 MLN
NYT  New York Times           $0.00     $0.24      -$34 MLN
NWL  Newell Rubbermaid        $0.42     $0.84     -$116 MLN
PFE  Pfizer                   $0.64     $1.28   -$4.315 BLN
RDC  Rowan                    $0.00     $0.40      -$45 MLN
STT  State Street             $0.04     $0.96     -$397 MLN
STI  SunTrust Banks           $0.40     $2.16     -$623 MLN
XL   XL Capital               $0.40     $1.52     -$370 MLN
ZION Zions Bancorp            $0.16     $1.28     -$129 MLN

Source: Standard & Poor’s
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