dividends in the US (iii): the 1990s

The most important factor in the performance (or lack thereof) of dividend stocks during the 1990s came at the end of the decade, during the Internet mania.

What were called at the time Technology, Media and Telecommunications (TMT) stocks exhibited exceptionally strong performance for several years, despite the fact that prices were wildly high for much of that time and that many newly-minted members of the club had dubious fundamentals.  The fever was fueled by loony research reports by figures like Henry Blodget of Merrill (subsequently banned from the securities business, now writing on finance for Yahoo) and Mary Meeker of Morgan Stanley (now with Kleiner Perkins).  It also featured the takeover of AOL by Time Warner, which must be one of the most calamitous financial combinations of all time.  These outsized gains came at the expense of the rest of the market, particularly value (i.e., low PE, low price/cash flow, low price to assets issues).

So dividend stocks took another beating, a là the late Seventies, setting them up for a strong run of outperformance once the speculative bubble collapsed.

Tomorrow, the present.

dividends in the US (ii): the 1980s

The 1980s were the inverse of the 1970s as far as dividend stocks are concerned.

Dividends were back in!!

Three factors were involved:


Paul Volcker was appointed as chairman of the Federal Reserve in 1979, with a mandate to break the inflationary spiral that was under way in the late 1970s–and which was poisn for dividend stocks.  He did so by raising interest rates sharply, thereby causing a deep recession in 1981-82 that erased the persistent belief that prices would be able to rise in an uncontrolled way.  Disinflation, slow but continuously reduction in the level of inflation, replaced accelerating inflation as the watchword of the 1980s.

As the rate of change in the price level slows, the ability to raise prices by, say 4% – 5% annually (and therefore profits and dividends) becomes progressively more valuable.  So the stocks that exhibit these characteristics become worth more as well.

commodities price declines

To the degree that the price of commodities inputs stabilizes or falls, and a firm is not forced to pass these savings on to customers, profit growth is enhanced further.


Dividend stocks–mature companies with slow-but-steady growth and substantial free cash flow–were crushed in the inflation-fear frenzy that characterized the late 1970s. After the worst of the ensuing 1981-82 downturn, investors began to notice how startlingly cheap stocks sporting, low PEs,  10% dividend yields and offering moderate growth were.  Adding 5% in earnings growth that causes a 5% rise in the stock price to a 10% yield would produce a 15% total return.  That’s without the higher risk attendant on holding a more cyclical name than a public utility or a cereal company.  And it ignores the possibility that the PE might rise.

The success of dividend stocks in the 1980s was not about a change in investor preferences–that would come after the turn of the century.  This was all about valuation + change in the direction of monetary policy.


Tomorrow, the 1990s.



dividends in the US (ii): the 1970s

Two significant inflationary forces marked the 1970s in the US:

–the two oil crises, one during 1973-74, the other during 1978-80, which drove the price of crude from under $2 a barrel at the start of the decade to over $35 at its end, and

–the start of runaway inflation in the US, only partly due to oil, that had prices rising by 8% yearly, with economists’ projections of +11% for the early 1980s.

Both had profound–and negative–effects on investor attitudes toward dividends.


Typical dividend stocks are of companies in mature, slow-but-steadily growing businesses that generate substantial free cash flow.  Think: consumer staples.  These firms usually have very little power to raise their prices.  In the best case, they can do so in line with historical inflation.  Even then, they run the risk of having customers switch to lower-cost substitutes.  Many times, though, prices are in a steady real decline.

In a world where inflation is  currently 5% and where price rises are accelerating to 8%+ per year, a stock now yielding 4%, with a dividend that can grow at best 5%, is unattractive.  Its yield is already negative in real terms and prospects are that it can only fall further behind.


Before the oil crises–and again today–the big international oils were regarded as quasi-bonds, attractive mostly for their dividend yields.  In a (mistaken) attempt to shield consumers from an increasing oil price, the US passed price control laws in the mid-1970s that set a cap on the selling price of US-produced crude from wells drilled before the oil shocks began.  This made US-based firms that had large oil reserves relatively unattractive investments.

Interest shifted instead to smaller, non-dividend-paying exploration firms that had the potential to make large finds relative to their size.

conventional wisdom

In business school I learned the conventional wisdom of the time.  It was that paying a large, growing, dividend was a sign of weakness in a firm.  It supposedly meant that the management lacked creativity.  The best they could come up with was to return excess funds to shareholders.  Therefore, dividend stocks should be shunned.

How times have changed!

Tomorrow, reversal in the 1980s.


dividends in the US stock market (i): 1970s

before my time

I began my stock market career in 1978.  I changed jobs in 1984, taking on stock markets in developing countries in the Pacific for the first time as part of my new duties.

One of the more striking features of these emerging markets was that the dividend yield on stocks was almost always higher than the coupon on the country’s government bonds.


How so?

At that time in these countries (and by and large still today), there were no large pension funds (because there were no pensions for workers) or other institutional stock market investors.  Making maybe $100 – $200 a month, workers were lucky to have savings accounts–and had absolutely no interest in equities. As a result, stock market investing was the province of ultra-wealthy individuals.  Because they were older and very affluent, they tended to be really risk averse.  They were interested in income, not growth.  They regarded stocks as a risky kind of bond.  So it was only natural for them to demand a higher yield as compensation for taking on the extra risk.

As you might imagine, this attitude had a strong influence on what kind of company could go, and remain, public.  These markets were/are chock full of mature firms with limited growth prospects but which generate large and stable free cash flow.

What has this to do with the US?

After the market crash in 1929 through much of the 1950s, in the US stock market, the dividend yield on stocks exceeded the coupon on long-dated government bonds. To me, reading the data long after the fact, the US stock market then looks a lot like the emerging markets I encountered in the 1980s.  Very different from today’s S&P.

On Monday, the inflationary 1970s.

attitudes toward dividends (i): risk aversion

As a general rule, as people become older and as they become wealthier, they become more risk-averse.

The operative word here is “more.”  Virtually everyone is financially risk-averse.  That is to say, almost all of us want to be assured of some reward before we’re willing to take risk.  (A pedantic note:  the opposite of being risk-averse is to be a risk taker or risk seeker.  That is, someone who is either willing to expose himself to financial risk without any thought to compensation, or,who craves the rush risk brings and is actually willing to pay to experience the possibility of financial loss.  Until recently, you could have said risk seekers were like Cubs or Mets fans.)

The mainstream financial risk question is about the price of risk–that is, how many units of return are necessary for someone to assume one unit of risk.  As we get older/wealthier, that number rises.

war story

At one time, I worked for a man whose family had been wiped out during the Great Depression but who had built a company in the 40 years since bankruptcy that was earning him $20 million a year.  I asked him for $100,000 to fund a new venture for the firm that would likely be earning, say, $500,000 a year within a half-decade.

He said no.  I don’t think it had anything to do with his view of my competence.  For him, the loss of $100,000 was much worse than the potential of a $500,000 annuity that might run for 20 years or more.  That may be an extreme case of risk aversion   …or maybe not.  For many family companies preserving at least the current level of income is way more important than anything else.

For my old boss, a mature company gushing free cash flow and paying increasing dividends would be far more attractive than Facebook, Alphabet or Amazon, even in their infancies.


More tomorrow.

why cash dividends?

In its most common form, a dividend is a distribution of a portion of a corporation’s profits to shareholders in cash.

Yesterday, the Financial Times published an article titled “Alarm grows as investors get bulk of listed groups’ profits:  Unusual situation that tends to occur only in periods of widespread economic weakness.”

The thrust of the article is that companies in the large-cap MSCI Global index are now paying out 51% of their profits in dividends.  That’s up from 43% two years ago (when presumably income for everyone not in natural resources was lower).  It’s also higher than the long-run median of 46%.

Suggested but not stated is the idea that these companies are mortgaging their long-term future by skimping on capital investment to satisfy myopic income-oriented investors. The subtitle of the article suggests the high payout ratio may be a harbinger of recession.

Personally, I’m not alarmed.  And I’m not sure the current situation is that unusual.  In fact, my experience is that corporate attitudes toward, and investor preferences about, dividends vary widely over different time periods and in different parts of the world.

That’s what I’ll be writing about over the next few days.

Some preliminaries today:

–dividends are supposed to be paid out of earnings.  If a company has no current or past profits, it can still make a distribution (why it would is a different question–although some fixed income funds do do this). That kind of distribution is called a return of capital.  The main practical difference is that a return of capital isn’t subject to income tax.

–sometimes a stock split is structured as a dividend.  In the US, this typically happens when the split is very small, like 21 for 20, which would be a 5% stock dividend. In most countries, managements doing so as a substitute for a cash dividend and appear to be hoping that shareholders accept this number shuffling instead of money it (a) wants to retain   …or (b) doesn’t have.

–spinoffs of assets are sometimes structured as dividends, as well.

–managements of dividend-paying companies tend to want to at least maintain the current level of recurring dividend payments.  If a company is feeling especially flush in a given year, it may decide to declare an extra one-time dividend payment.  It will label the payment as “special” or “extraordinary,” to make sure shareholders understand this is not a recurring event.

–unlike the case with preferred shares or coupon-bearing debt, management makes no promises to maintain the current level of dividend payments, or even to pay a dividend at all.   Around the world, however, a dividend cut, meaning reduction or elimination of the dividend payout, is regarded as a very bad thing.  It usually provokes a sharp negative reaction in the stock price   …more so outside the US than inside.  That’s because it signals either very poor management planning or a sharp deterioration in a company’s business.  Investors also tend to have very long memories when it comes to dividend reductions.

–in my experience, the best indicator of a possible future dividend cut is that the company has cut the dividend in the past.  The next best is a close analysis of the sources and uses of funds section of the financial statements.


More tomorrow.



2Q15 earnings for Intel (INTC): back to waiting mode

the results

After the close last night, INTC reported 2Q15 results.  Revenue came in at $13.2 billion, down 5% year-on-year.  Operating profits were down by 25%.  Net was $2.7 billion, however–off by only 3%.  EPS came in at $.55, flat yoy (due to continuing share repurchases shrinking the total shares outstanding).  That figure beat the analyst consensus of $.51.

The main points, as I see them:

–cloud business was stronger than expected

–PC business was weaker, due presumably to overall GDP softness in emerging markets, especially China, and in the EU

–the overall business is shifting to higher-end, more cutting-edge products.  This is resulting in lower than expected volumes.  Higher prices and margins are offsetting this

–even though INTC is expecting a bounceback during the back half of the year from an unusually weak first six months, it is edging down its full-year forecasts slightly to account for continuing weakness is the PC market

–the 2Q tx rate was a miniscule 9.3%, compared with 28.8% in 1Q.  That’s because INTC has decided that some cash balances earned abroad and held overseas are permanently invested there and is asking the IRS for a refund of taxes previously paid on this money.  Eps would have been around $.47 at the 1Q15 tax rate.

waiting for…

–the Altera (ALTR) acquisition to close and new field programmable gate array-based microprocessor products to emerge

–world GDP to accelerate

–the product balance to shift to non-PC products (the cloud, the internet of things…) to a degree that they, not PCs, define the company

–tablets to become profitable

in the meantime

I’ve been surprised by the weakness in INTC shares over the past six weeks or so, as the extent of softness in the 2Q15 PC market has become apparent.

My picture has been that the stock goes sideways, supported by a discount PE multiple and a 3%+ dividend yield, while the company (successfully) transitions into a post-PC world.  I continue to think that this is not so bad for shareholders during a time like the present when the market in general is likely to go sideways.

The key question, for which I have no strong answer (because I’ve been thinking I still have time to formulate one), is what to do as/when economic activity begins to accelerate.  Clearly, in my mind at least, if overall corporate profits begin to rise quickly, being paid 3% to wait for future developments won’t appear to be such a good deal.  I don’t think the current weakness in INTC shares is the first inkling of this sort of shift.  But it’s something I have to consider.