Companies hope to woo investors with dividends

Posted: Friday, August 01, 2003

NEW YORK (AP) This quarterly earnings season, all eyes aren't just looking out for signs of surging profit growth. Much attention is being paid to the big jumps in dividend payouts, too.

Just two months after the passing of dividend tax cuts, companies are trying to hook investors with promises of more guaranteed cash. Some, including Goldman Sachs and Citigroup, have more than doubled their offers.

That's a dramatic shift from the recent past, when dividends were dismissed by both investors and companies as the best way to spend corporate dollars.

''Paying dividends seems to be becoming as popular among firms as setting up your own Web site was during the dot-com era of the late 1990s,'' Edward Keon, a quantitative strategist at Prudential Equity Group, wrote in a recent report.

Stock dividends, which are a portion of earnings paid in cash to shareholders, have long been considered a key component to investment returns. In fact, from 1926 through June of this year, they represented 41 percent of the total return in the Standard & Poor's 500 stock index.

But during the stock market boom, dividends fell out of favor as stock prices soared and investors wanted companies to use their cash to fund expansion and make acquisitions, with the expectations stocks would climb higher.

''As long as the market was providing high capital appreciation, investors didn't care about dividends,'' said Edward von der Linde, a portfolio manager at the money management firm Lord Abbett. ''The pendulum is now shifting.''

The renewed interest began last year as investors looked for anything that would guarantee them some kind of return in the midst of the bear market.

And now, companies are boosting their payouts as a way to court investors.

So far this year, there have been 163 dividend increases from stocks in the S&P 500, up from 113 a year ago. That could easily outpace the 197 increases for all of 2002.

In addition, 12 more companies in the S&P 500 started paying dividends this year, bringing the total to 363.

Fueling much of those gains has been the recent tax cuts. Companies are banking that investors will look more seriously at dividend-paying stocks now that they have to pay less in taxes.

Just last week, Viacom cited the tax change when announced it would begin paying a 6 cent-per-share quarterly dividend, its first since 1987. The same reason was given by Goldman Sachs when it said in late June that it would boost its dividend from 12 cents to 25 cents.

The new law signed in May reduces the tax rates on dividends for the highest U.S. earners to 15 percent, less than half the maximum 35 percent on ordinary income. Low-income taxpayers will pay a 5 percent tax through 2007 and then none at all in 2008.

Take the example of Citigroup, which announced in mid-July that it was boosting its annual dividend by 75 percent from 80 cents to $1.40 a share.

Under the old rules, that 80 cents a share would have be taxed as ordinary income, which would have left high-income investors with about 52 cents a share after taxes. Now, the $1.40 a share will be taxed at a rate of as high as 15 percent, with investors walking away with $1.19.

A recent survey of chief financial officers conducted by Financial Executives International and Duke University's Fuqua School of Business found that 13 of the 48 public companies surveyed that already pay dividends said they will probably increase their offers.

Of the 87 public companies surveyed that do not currently pay dividends, 10 said they will likely initiate dividends in response to the tax cuts.

Beside the tax cuts, the recent dividend increases have also come as business confidence has started to rise. With the economic growth expected to pick up during the second half of this year, companies aren't as panicked about promising cash payouts.

With all the talk about dividends in the market, analysts and investors are scurrying to figure out what companies will announce the next big jumps.

Banks and utilities have already been particularly generous in raising dividends, and are expected to continue increasing their payouts.

Prudential's Keon has come up with other possibilities based on investment and technical merits. Included on his list: Limited Brands, PepsiCo and United Parcel Service.

Despite the dividend frenzy, not everyone is jumping in.

Even with technology giants like Microsoft and Qualcomm issuing their first-ever dividends this year, many young high-tech companies still prefer to dedicate their cash to internal projects rather than promising it to investors.

''For high-growth companies, offering a dividend would change the perception in the market of what they want to be,'' said Howard Silverblatt, quantitative analyst at S&P.

For now, dividends seem to be catching both investor and corporate interest. But if the market continues its recent climb, there is no telling what is to come.

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



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