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The dark side of the dividend boom
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The cuts in taxes on dividend income pushed through by the Bush administration have helped put the dividend back on the table as a shareholder-friendly corporate strategy. The 2003 Jobs and Growth Tax Reconciliation Act reduced the top rate on taxes on dividends to 15% from near 39%. The new rate is a 70-year low.
But that doesn't seem to be all that's going on. In the 1990s, dividend increases failed to keep pace with rising stock prices, at least partly because companies thought they had better uses for their cash flow. When the potential return from reinvesting cash in the company seems high, companies are more reluctant to distribute cash to shareholders. It's logical: If the return on reinvested capital is high, it is actually to the long-term benefit of shareholders for the company to refuse to pay out dividends and instead keep that cash for its own reinvestment. From this perspective, the drop in the dividend payout ratio in the 1990s was a tribute to corporate optimism about the opportunities for growth that they saw in that economy.
Something like the reverse of that thinking is playing a role in the recent growth of dividend payouts. Despite the strong economy, companies have been curiously reluctant to spend money on capital equipment and expansion. Corporate cash levels are climbing. The technology sector is a key example. Investors think of this sector as the home of go-go growth companies, always looking for ways to raise cash to exploit the endless opportunities ahead of them. But, Standard & Poor's says, the 78 technology companies in the S&P 500 are sitting on roughly $140 billion in cash.
Large institutional investors are starting to wonder if maybe there is a capital-spending problem. Back in September, 50% of global fund managers in a survey told Merrill Lynch (MER, news, msgs) that companies aren't investing enough in their own businesses.
I can understand why. One effect of the new global markets where, overnight, a Chinese or Indian company can build a factory and undercut an established competitor's prices -- killing profit margins -- is that investing in production is riskier than ever. (It's also more essential than ever. If a company doesn't invest in constantly reinventing its factories and workforce, it becomes increasingly vulnerable to global competition. That, however, is another story.)
In the 1990s, too many dollars reinvested by companies led to huge overcapacity and a stock market crash that decimated major sectors of the technology economy so badly that they're still struggling to recover.
In the current decade, too few dollars reinvested by companies could lead to more jobs going to overseas competitors and to lower economic growth in the United States somewhere down the road.
Somewhere in here there's a balance. Let's hope that the current dividend comeback finds it.
And meanwhile, I think investors looking to outperform the market will pay more attention to stocks with decent and growing dividend yields in the years ahead.
New developments on past columns
"The best odds in Las Vegas": After drifting lower from the end of July through Monday, shares of Station Casinos (STN, news, msgs) abruptly reversed course. On Tuesday and Wednesday, they jumped a total of 8.3%. The catalyst: a deal to develop Aliante Station, a hotel and casino in Aliante, a 1,905-acre master-planned community in North Las Vegas. Station Casinos will develop and manage the gaming facility at the intersection of Interstate 215 and Aliante Parkway. The announcement produced an upgrade to an outperform rating by investment house CIBC World Markets. CIBC estimated that the project adds a net present value (that's a method for figuring out how much the future profits this project will generate adds to the value of the stock now) of $3 a share to Station Casinos' stock. While they're waiting for the first spade to hit the ground at Aliante Station, investors who deal with the here and now can take comfort in the continued hot growth of the local gaming market -- a Station Casinos specialty. In October, gaming revenues on the Las Vegas Strip climbed 15%, certainly not bad. But revenues from the market for gaming by local residents in North Las Vegas and Boulder Strip (where Station operates) climbed 33% and 35%, respectively, Morgan Stanley says. (Full disclosure: I own shares of Station Casinos.)
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Station Casinos.
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