Do cash dividends matter? It was a robber baron and oil tycoon that once said:
Do you know the only thing that gives me pleasure? It’s to see my dividends coming in. – John D. Rockefeller
Investors want companies to show them the money. Or in this case, cash dividends. Although the stock market continues to grind up, more and more companies are not showing investors the money. That is in clear decline, suggesting important, fundamental investment principles are being ignored. This won’t last though: it never does. If you are becoming aware of this for the first time, then please read on.
The cash dividends companies pay shareholders are a signal of financial health. Companies that pay growing dividends typically have good or stable balance sheets and experience rising earnings. Companies that find themselves cutting their dividends are in the opposite situation. My research from a year ago showed dividend growth on the S&P 500 had decreased to a level consistent with past recessions. The decline in dividend growth was also widespread across sectors.
Has much changed since? I decided to address that question by looking at it from a different angle. I am referring to the perspective of the number of companies increasing and decreasing their dividends. As you will see, the direction is not favorable to investors.
Less Dividend Growers
Shown in the graph below is the number of companies on a monthly basis that increased dividends (green bars) or paid extra or one-time dividends (red bars) since 2004. In either case, these are companies paying out more cash to shareholders. You can see in the previous economic cycle that the number of companies paying out more cash to shareholders, on a trailing 12-month basis (black line), peaked at 2,594 in March 2007. Only 9 months later, the number of companies on a trailing 12-month basis that paid out more cash to shareholders fell . . . but by only 4%. Nevertheless, the recession (grey area) that began in late-2007 had officially started.
In the current economic cycle, the number of companies paying out more cash to shareholders, on a trailing 12-month basis, peaked at 3,265 in late-2014. This happened to be right around the time the Federal Reserve’s third quantitative easing (QE3) program ended. From that peak to March 2017, the number of companies on a trailing 12-month basis that paid out more cash to shareholders has fallen by 22%. In the previous economic cycle, a 22% drop from the peak occurred in late-2008, which was a time the world was embroiled in both an economic recession and financial crisis.
More Dividend Cutters
In situations where there are less companies paying out more cash to shareholders, what you will also find is more companies cutting or eliminating their dividends. You can see this in the graph below. In the middle of the previous economic cycle, the number of companies cutting (blue bars) or eliminating (red bars) their dividends, on a monthly basis, was consistently less than 20. That’s good. That all changed in November 2007, which was one month before the last recession began. 22 companies cut or eliminated their dividends. The number of companies cutting or eliminating their dividends subsequently skyrocketed before peaking at 144 in March 2009. That was coincidently was the month the S&P 500 bottomed before starting a new bull market.
In the current economic cycle, the number of companies cutting or eliminating their dividends bottomed at 5 in mid-2010 and mid-2011. The last time the S&P 500 experienced double-digit earnings growth was coincidentally in those two years. Beginning in mid-2012, 20 or more companies cutting or eliminating their dividends in one month began happening on a regular basis. In fact, 20 or more companies in one month have cut or eliminated their dividends in 52 of the 56 months from August 2012 to March 2017. In the 12-months to March 2017, the number of companies that have cut or eliminated their dividends has increased to 573. The last time this happened was in late-2008, which was the height of the Global Financial Crisis.
To put things in perspective, consider the ratio of dividend growers vs. cutters. You can see this in the graph below. On a trailing 12-month basis, the ratio of dividend growers vs. dividend cutters peaked in mid-2005. There were approximately 42 companies paying extra dividends or increasing its dividends for every 1 company cutting or eliminating its dividend. That’s a ratio of approximately 42:1. As of March 2017, the ratio dramatically fell to approximately 4:1. The last time the ratio slid to this level was in late-2008, which proved to be a very unpleasant time for most investors.
Cash is supposed to be king. Dividends are supposed to give pleasure. The stock market doesn’t seem to see it that way right now. When fundamentals don’t matter, they have historically proven to be times of bubbles. I imagine the stock market will return to its senses, as it always does. When it does though, it may prove too late.
Whether or not you believe cash is king or dividends give pleasure, please consult an investment fiduciary before making any investment decisions. Should you be in search of an investment fiduciary, Meritocracy Capital Partners Inc. would welcome the opportunity to serve as your partner.
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