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Don't expect tax cuts to mean big boost in dividend payouts

Posted: Friday, January 10, 2003

NEW YORK (AP) -- Even if a new economic stimulus plan wipes out taxes on dividends for investors, don't count on companies rushing to boost their payouts as a way to woo people to buy their stocks.

It isn't going to happen, at least not in these tough economic times.

Many companies right now can't afford to simultaneously boost dividends payments and plunge money into investment spending on new factories, equipment and technology.

So they will have to make a choice. And chances are, they'll decide to improve operations, and thus help boost future profits, before they start giving money to shareholders.

A stock dividend is a portion of a company's earnings paid in cash to shareholders, generally every quarter.

Those reliable payments have made dividend-paying companies increasing popular recently among investors battered by the bear market. The renewed attraction of these stocks is evident in their returns over the last three years.

The 351 dividend-payers in the Standard & Poor's 500 stock index rose 0.8 percent, on average, from 2000 to 2002. The overall S&P index fell 40 percent during the same period.

There's a good chance that these stocks will get even more of a lift, thanks to a dividend-tax relief plan that President Bush proposed Tuesday as part of the government's initiative to recharge the economy.

That's because investors, who will likely see dividend taxes get cut, will start buying more dividend-paying stocks. It won't just be the guaranteed payments attracting them to these issues, but the tax breaks, too.

Still, investors need to keep expectations in check when they put money into these stocks. They may pay less in taxes, but they can't count on companies to start raising their dividends just because of the increased interest in these stocks.

''It is interesting that some investors believe that there will be an imminent investment spending cycle and a wave of increases to dividends paid by corporations as a result of changes to tax laws and better credit conditions in the economy,'' Richard Bernstein, chief U.S. strategist at Merrill Lynch, wrote in a recent report.

''It seems to us that there can only be so many demands on corporate cash flow,'' he said.

As the economy has weakened, so have earnings for corporate America. So companies are hard-pressed for money to build or revamp their businesses. That's where their earnings are likely to go, at least those not already committed to dividends.

For the last three years, companies have held back on making drastic improvements in their facilities and technology.

In fact, the Commerce Department in its gross domestic product report last month said that business investment on warehouses and factories fell at a 21.4 percent annual rate in the third quarter.

Spending on equipment and software has been up slightly in the last two quarters, after six quarters of declines, but it is still far below what it was a few years ago.

Companies realize that it is an important time to increase this spending, and update and improve the efficiency of their businesses. Their goal is to increase future profitability, which would benefit shareholders with higher dividends over the long run.

So when it comes to dividends, what you see is what you'll probably get for now.

After all the losses on Wall Street over the last three years, that might be enough.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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