‘Death to dividends,’ we vowed in 1998. Boy were we wrong. President Bush’s proposal to end double-taxation of dividends could bring the cash payout back from the brink. Even companies that would never have dreamed of it are now taking a close look at dividends, with tech powerhouses like Cisco and Oracle hinting they might suddenly transform into widows and orphans stocks.
Five years ago the S&P 500’s average yield was sinking past 1.5 percent as stock prices rocketed. Today the average is only 1.7 percent despite much lower stock prices. The fund managers we talked to in 1998 didn’t see the point in dividends after yield sank below 2 percent. Then the only thing standing in the way of wholesale dividend cuts was the implied bad news effect on investors and analysts.
What fund managers wanted then and what they need now are healthy companies with growing earnings and rising stock prices. But a rash of dividends could stop companies from spending to grow or to acquire other companies, meaning slower earnings growth. It could reduce buybacks, meaning higher dilution from options and lower earnings per share. It could lead to rising debt levels, meaning unstable companies.
Wouldn’t it make more sense to tackle the other side of double taxation by slashing corporate taxes? That would benefit all stakeholders, not just the wealthy few who own shares directly and thrive on dividends. No wonder Democrat Senator Tom Daschle calls Bush’s proposal the Leave No Millionaire Behind Act.
A point getting little attention is that capital gains tax would effectively be reduced, too. You should wait and see before rushing into launching a dividend. After all, it’s a whole lot harder to cut a dividend later; there can be only one interpretation and it’s a negative one.
Microsoft was the first cash-rich contender to announce a brand new dividend last month. It was careful to couch the announcement in soothing words about ongoing buybacks and ‘very broad and deep investments in research, sales and marketing.’ They’re no fools; they know investors and analysts would worry the dividend meant there was nothing better to spend the cash on.
Wall Street was delighted, at least until the news sunk in that Microsoft’s last quarter’s revenue was lower than expected because of weak tech spending. Was it coincidence that a stock split was announced the same day? That’s little but window dressing. The new dividend is 8 cents a share (post-split), giving Microsoft a yield of just 0.29 percent and costing it $850 mn, which barely puts a dent in a $40 bn cash pile. Between Bush’s tax feint and Microsoft’s minuscule dividend coming close on its heels, is that the whiff of spin we smell?
