As the financial crisis hit its apex in late-2008 and early 2009, companies reeled in their investments and began hoarding cash. Many were also forced to cut their dividend payouts to conserve what little capital they had.
In fact, more than 800 companies reduced their dividend payouts in 2009. Companies in the Standard & Poor's 500 Index reduced their dividend payouts by a collective $38.7 billion in the first three months of 2009, making that quarter the worst on record. For the year, dividends were slashed by a record $52 billion.
But the economic outlook for the United States suddenly looks much better now than it did a year ago.
Earnings for companies in S&P 500 surged 176% in the fourth quarter of 2009 and probably rose another 44% in the first quarter of this year, according to Bloomberg data. And that rise in earnings has been accompanied by a rise in cash holdings.
A recent analysis by Standard & Poor's Financial Services LLC found that companies in the Standard & Poor's 500 Index have some $831.2 billion on hand – 36.3% more than they had in December 2007 when the recession officially began.
Now investors are pressuring many of these corporate cash-hoarders to do something with the money they have on hand. Some of it will go towards the purchase of new equipment, the hiring of more staff, share repurchase programs, and acquiring rivals. But it's also a safe bet that a large portion of that newfound wealth will be paid back directly to investors through dividends.
"Dividends show what companies are really saying, how they feel about the economy and their prospects," Tom Wirther, senior investment officer at Chemung Canal Trust Co., told Bloomberg.
Of the 241 companies in the S&P 500 that already pay dividends 215 are likely to keep payouts at their current level, and 26 might increase them, according to Bloomberg. The last time every single company in the index maintained or increased rates was the second-quarter of 2004, according to S&P data.
Over the past week alone, a record 22 companies announced they would reward investors with higher dividend payouts.
So where can investors find these "dividend divas?"
The Best of the Best
A good place to start looking for "dividend divas" would be the energy sector.
Some 23 companies in the energy sector are expected to boost their dividend payouts through the end of the quarter – the most among the 10 groups in the S&P 500.
ExxonMobil Corp. (NYSE: XOM) last Wednesday bumped its dividend up to 44 cents a share from 42 cents. Exxon is a strong choice because it has raised its dividend for 28 consecutive years. In that time, Exxon's dividend payments to shareholders have grown at an average annual rate of 5.7%, according to the company's Web site.
Similarly Chevron Corp. (NYSE: CVX) – whose first-quarter profit more than doubled – boosted its dividend payout by 5.9% to 72 cents a share. Chevron has now raised its dividend for 23 straight years. The company's stock now yields an impressive 3.5%.
Indeed, companies that have a long history of dividend increases are always a good bet. They may be safe – boring even – but they're also reliable.
Consumer staple Kellogg Company (NYSE: K) – founded in 1906 – has paid dividends since 1986. On April 23, the company increased its payout by 8% to $0.405 per share. Kellogg currently yields about 2.72%.
J&J last week boosted its dividend payout by 10.2% and the stock currently yields 3.32%. P&G earlier this month increased its payout by 9.5% from 44 cents a share to about 48 cents a share. P&G has paid a dividend for 120 consecutive years since its incorporation in 1890. This marks the 54th consecutive year that the company has increased that dividend.
Finally, International Business Machines Corp. (NYSE: IBM) said last Tuesday that it would raise its dividend to 65 cents a share from 55 cents a share, representing an 18% increase.
Together, IBM, Exxon, Procter & Gamble, and Johnson & Johnson account for about 11% of the S&P 500's total dividend yield.
While these companies have already raised their dividends, many others are set to announce payout increases in the weeks and months ahead.
One such company is General Electric Co. (NYSE: GE) – but not until 2011. GE cut its dividend by 68% during the credit crunch and reduced its headcount by about 26,000.
Chief Executive Officer Jeffery Immelt told investors on Wednesday that GE is returning to "good, solid" earnings growth and that the dividend – which many of the company's retirees count on for income – will be raised.
"I know how important the dividend is. Earnings growth is reappearing for GE. Your dividend is going up again soon," Immelt said.
However, when pressed for specifics Immelt acknowledged that investors would have to wait until "at least" 2011.
Verizon Communications Inc. (NYSE: VZ) is another company whose dividend could see a sigificant boost over the next few years.
Verizon stock already yields a juicy 6.4%, but the company expects to see stronger free cash flow as it rolls out its FiOS high-speed, fiber-optic Internet and TV service.
"[Verizon] will in all likelihood raise the dividend once this capital expenditure is done," Larry Sarbit, chief investment officer for Sarbit Advisory Services and sub-adviser to IA Clarington on the IA Clarington Sarbit U.S. Equity Fund, told CTV.
Verizon reported a 25.6% increase in free cash flow in the first quarter and the $1.90 a share Verizon stock pays annually represents a payout ratio of 79% based on 2009 earnings.
"We are a business that generates lots of cash flow," Verizon chief financial officer John Killian said on a conference call. "We have a lot of different levers that we can pull to make sure that we have the ability to pay the dividend. Being in a position to recommend to the board dividend increases is highly, highly important to us."
Fortunately for many investors, other companies have plans to boost their dividend payouts much sooner.
JPMorgan Chase and Co. (NYSE: JPM) is one of the few financial heavyweights to emerge from the financial crisis with an eye towards increasing its cash payout.
Jamie Dimon, the bank's chief executive officer, said a dividend hike "may be" in store "down the road a little more", perhaps in the second half of 2010.
JPMorgan's announcement that it earned 74 cents a share in the first quarter put it well ahead of Wall Street estimates, but the bank wants to be sure that the economy is on solid footing before acting. The bank said its Tier 1 capital improved to 11.5% in the first quarter.
"Regulators told [banks] not to [raise dividends] until they know what the environment will look like and what new capital ratios will look like," Yousef Abbasi, financial desk analyst at Execution Noble, an investment bank and trading firm in New York, told CNBC. "How embarrassing would it be if JPMorgan went ahead and increased their dividend and then they were told they have to raise more capital?"
Investors should keep a close eye on all of these companies, as dividend increases often are a good barometer of corporate health.
"Dividends are emblematic of corporate strength," Jack Ablin, chief investment officer at Chicago-based Harris Private Bank told Bloomberg. "It is remarkable to me the level of cash on corporate balance sheets. It's certainly a strong vote of confidence for corporate America right now."
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