If dividend increases signal confidence, then it looks as though the corporate landscape is feeling giddy about the future – even as events in Europe continue to weigh heavily on the stock market.
Dividend increases are breaking out all over the place. On Thursday alone, BCE Inc., National Bank of Canada and Ford Motor Co. hiked their quarterly payouts – and they followed increases earlier in the week from Laurentian Bank of Canada and Enbridge Inc.
True enough, banks and utilities are in the business of hiking dividends on a regular basis, usually annually. But in the case of Laurentian, National Bank and BCE, the increases this week mark the second boosts this year. And in the case of Ford, a company that operates within a highly cyclical industry, the automaker reinstated a dividend that had been absent for five years.
Dividends attract income-loving investors to a stock, but they serve another role too: They provide an indication from management that a company's operations are strong enough to maintain that dividend – if not raise it – for a long, long time. That's because there is often a stigma associated with dividend cuts, one so strong that management will do pretty much anything to avoid tampering with payouts.
So is there a signal implied in the rash of increases? Given that investor confidence is unusually shaky right now over the European debt crisis and its impact on the global economy (the S&P 500 trades at just 13-times trailing earnings, well below its highs of the past decade), it fits that companies are trying to telegraph confidence in their own operations.
Ford stands out here. The company's chief financial officer said in a statement that the dividend "will be sustainable through economic cycles" – clearly heading off any uncertainty that the nickel-per-quarter merely reflects a current winning streak.
Still, companies aren't always good at following these confidence-boosting measures with actual reasons to feel confident. Bank of America Corp. raised its dividend in 2007 on the eve of the financial crisis, only to cut it in half in 2008 and then more severely in 2009. Manulife Financial Corp. raised its quarterly dividend in 2007 and 2008, when the financial crisis was in full bloom (what us worry?), then cut it in half in 2009.