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Dividend Trends Leave Analysts Unimpressed

October 19, 1992

NEW YORK (AP) _ In keeping with much of the other economic news, corporate dividends have been making only grudging progress of late.

If you measure, for instance, by the number of dividend increases declared, 1992 is shaping up as a better year than 1991 - but still subpar by traditional standards.

Many analysts worry that the pace will have to pick up substantially before too long just to support stock prices around their recent levels.

Over the first nine months of the year, analysts at Standard & Poor’s Corp. tallied 946 dividend increases, representing a 22 percent increase over the corresponding period in 1991.

Arnold Kaufman, editor of S&P’s advisory publication The Outlook, now estimates a gain for the full year of 15 percent to 20 percent. But that would only about match the total for 1990, which was the second smallest in two decades.

″Corporations remain cautious this year in the face of disappointing business conditions,″ Kaufman observed.

So even with the increases that have occurred, dividend yields of the prominent stock-market indicators remain near historically low levels - a shade above 3 percent.

″Going back to 1920,″ reports Michael Sherman, an analyst at Shearson Lehman Brothers Inc., ″except for some very brief moments (namely in 1965, 1987 and earlier this year, when the Dow Jones was trading at 3,400), the averages have never yielded less than 3 percent.″

To keep things within those historical bounds, Sherman suggests, ″should mean that future price gains are dependent on dividend growth.″

If corporate earnings continue to improve, dividends theoretically ought to follow. But one obstacle to such a sequence, Sherman says, is that companies now are paying out about three-quarters of their earnings as dividends, against a historic payout rate of about 50 percent.

″It is going to take a major surge in earnings to stimulate a moderate rise in dividends,″ he concludes.

To many optimists, such concerns are mitigated by the unusually low levels of current interest rates, which have the effect of making stock yields look generous by comparison.

″Analyst after analyst is assuring us that today’s historically high price-to-earnings ratios and low dividend yields don’t matter because Treasury bill yields are so low,″ observes Stephen Leeb in his investment letter The Big Picture.

In effect, the argument goes, a stock dividend yield of 3 percent carries much greater weight now with T-bills yielding only 3 percent or less than it did a few years ago, when T-bill returns were twice as high or more.

But to make that kind of appraisal, Leeb asserts, is ″literally like comparing apples to oranges. By comparing T-bills to stock yields, you’re comparing the return on an ultra-short dated asset to an ultra-long dated asset.

″Yes, they’re both investments, but the relationship between returns on T- bills and stocks is statistically insignificant.″

Twenty years ago, Leebn notes, stock yields stood far below T-bill yields. But 40 years ago, stock yields were more than double what T-bills paid. In fact, in those days it was often argued that stocks should consistently yield more than fixed-income investments to compensate for the extra risks they represented.

Furthermore, many market-watchers wonder how vulnerable stocks might be now, should interest rates begin a sustained rise.

″Only low short-term interest rates are keeping me from calling ’sell,‴ said Melissa Brown at Prudential Securities in a recent analysis.

In Leeb’s view, ″stocks are overvalued today. And while we’re not on a precipice, a correction in excess of 15 percent is likely once interest rates begin rising.″

End Adv for Monday, Oct 19.

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