Amid the joy and relief over the market rally, investors may have missed something: While one source of returns on their stocks has been improving, another source has gone stagnant.
Standard & Poor's yesterday reported that the third quarter, while stellar for stock prices, was absolutely abysmal for stock dividends. In fact, it was the worst third-quarter performance on S&P's record books.
Of the roughly 7,000 (mostly U.S.) public companies that reported dividend information to S&P, just 191 issued "positive" dividend actions (increases, resumptions or special dividends) in the quarter ended Sept. 30, the lowest third-quarter number since S&P began tracking the data in 1955.
Meanwhile, 113 companies lowered or omitted their dividend payments in the quarter, the most third-quarter negative actions in 27 years. The ratio of positive to negative actions for the quarter was a thin 1.7-to-1 - a far cry from the historical average of 15-to-1.
For the first nine months of 2009, the number of negative dividend actions actually slightly outnumbered the positives. If the year's trend continues in the fourth quarter, it would be the first time on record that dividend decreases have outnumbered increases.
DIMINISHING YIELDS
The combination of surging stock prices and stagnant dividends has knocked the wind out of dividend yields (annual dividend payments as a percentage of stock price), which had reached dizzying heights during the stock market swoon of last fall and winter.
The overall dividend yield on S&P 500 stocks was below 2.3 per cent at the end of the third quarter, putting yields back at their pre-Lehman-collapse levels. That's more than a full percentage point below the returns from dividend cheques that investors were receiving just six months ago (though, obviously, the 50-per-cent-plus rise in prices seems like a more-than-fair trade-off).
On the other hand, the dividend slump has helped put more cash in corporate coffers, especially now that earnings are starting to show signs of recovery. As Scotia Capital strategist Vincent Delisle pointed out in a report last week, S&P 500 companies held an estimated $635-billion (U.S.) in cash at the end of the second quarter, thanks in no small part to cash-conservation efforts such as slowing their dividend payments and share buyback programs. He believes all the excess cash has set the stage either for mergers and acquisitions or dividend increases in the coming months - both of which would be positive for share prices.
LOOK TO YEAR-END
S&P senior index analyst Howard Silverblatt said the third quarter may prove to be the low point for dividends - and the next few months will probably prove whether he's right. That's because companies typically spend the fourth quarter setting their budgets for the next year, making the runup to year-end a key time for setting dividend policy.
By Christmas, we should have a pretty good idea whether companies are feeling optimistic enough to share some of that cash with shareholders, or if they'd rather hold the line and see how 2010 plays out.
David Parkinson