Good News For Investors: The Dividend Spree Is Just Beginning
At first blush, it's hard to reconcile a pair of percentages: 2% and 22%.
The first figure is roughly the speed at which the U.S. economy has been growing. The second figure is the speed at which dividend payments grew in 2012.
But as we've told you before, corporate America is sitting on a massive $1.3 trillion cash pile that it accumulated during the Great Recession. We at StreetAuthority call this the "Dividend Vault," because we think much of that cash will go to shareholder-friendly measures like dividend increases and share buybacks.
And so far, we've been right.
In fact, all of the companies in the S&P 500 distributed a collective $310 billion in dividends last year, according to FactSet Research, well higher than $255 billion doled out in 2011 and the previous record of $265 billion in 2007.
Logic would tell you that a slow-growing economy and record dividend payments means this trend must cool off. Yet a pair of factors suggest that dividend payments can grow at a solid 10% pace for a number of years to come -- and for certain companies, a much faster pace than that.
Do the numbers
The fact that the economy remains in a subdued state -- and we're unlikely to see GDP growth of more than 3% anytime soon -- doesn't mean that corporate profit growth is in trouble.
Companies continue to find ways to streamline costs. As a result, they're able to generate net income growth in the 5% to 10% range. The fact that many companies are now aggressively buying back stock means that per-share profits can grow at a slightly faster pace.
Analysts currently expect aggregated profits in the S&P 500 to rise around 8%. Simply keeping payout ratios constant would provide for 8% dividend growth. But payout ratios aren't constant -- they're rising.
The reasons behind rising payout ratios are twofold.
First, companies amassed massive cash hoards after the 2008 economic crisis. Many are now realizing that they have gone too far. Companies like Apple (AAPL) are sitting on absurd amounts of cash -- and starting to plan for a future with less cash. Much of that cash will go toward dividends. [A few weeks ago, I predicted that Apple would move to boost its lackluster stock with a massive buyback. A few weeks later, that's exactly what they did.]
Second, the low-growth economy means that companies see little reason to make major investments in growth initiatives, and realize that it no longer makes sense to earmark a high level of annual profits into capital spending. So they are boosting the payout ratio instead.
In the fourth quarter of 2012, companies paid out 30% of their profits in dividends. That's up from around 28% in 2011 and in line with the 13-year average (when recessionary years are excluded).