If the U.S. economy is struggling again and expectations for earnings season – which begins on Tuesday, after markets close – are dim, are investors justified in being a touch worried about dividends?
Brockhouse Cooper remains skeptical about the economic backdrop (a global slowdown is coming) and the earnings season (10 per cent earnings growth over the next year? No way). But despite their cautious approach, they believe that dividends are safe.
“During the Great Recession, the financial crisis forced banks to suspend dividends,” they said in a note. “This was the exception, not the norm. This time around, the capacity to pay dividends is still intact.”
For one thing, companies have remained tight-fisted in their approach to cash holdings, preferring to store their savings in a safe place rather than distribute them to shareholders. Oh sure, overall payouts among U.S. companies have returned to levels seen before the 2007-2009 downturn, but in relation to earnings these payout increases have been modest.
According to Brockhouse Cooper’s numbers, the dividend payout ratio among U.S. companies is just 27.9 per cent, which is near a 140-year low. If things got really bad, they would expect companies to maintain their dividends by allowing their payout ratios to rise.
They noted that U.S. companies also have a better safety cushion these days, with operating cash flows for companies in the S&P 500 about six-times larger than dividends paid.Report Typo/Error