Cautious corporations continue to sit on a mountain of cash at the start of 2014, uncertain about hiring decisions, the direction of the economy, and legislative challenges at both the state and federal levels.
At the same time, shareholders are becoming more outspoken in their demands the money be put to work, either to make investments to enhance the long-term growth prospects for the company or return it to investors in the form of dividends and stock repurchases.
Cash dividends paid out by the companies in the S&P 500 stock index in 2013 totaled a record $311.8 billion, topping the amount paid to shareholders in 2012 of $281.5 billion.
“Dividends had a great year, with the actual cash payment increasing by over 10 percent to set a new record," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indicies.
"Payout rates, which historically average 52 percent, continued to remain near their low at 36 percent. At this point, we expect the first quarter to be a very busy positive period for dividends, with 2014 setting another record for payments.”
A study by Standard & Poor’s shows the importance of dividends over time. From December 1926 to December 2012, dividend income accounted for 34 percent of the monthly total return of the S&P 500. In the 1940s and 1970s, dividend income represented more than half of total return.
While dividends are an immediate benefit to shareholders, stock repurchase plans are designed to provide share price benefits over the long term. Buybacks reduce the number of outstanding shares of company stock, which increases earnings per share.
In the fiscal year ending in September 2013, S&P 500 companies spent $445.3 billion on buyback expenditures, a 15 percent increase from the previous year.
“Companies have significantly increased their shareholders’ returns through higher buybacks and regular cash dividends. These two expenditures combined reached $207 billion in the third quarter, the highest level since the fourth quarter of 2007 and almost three times the $71.8 billion level we saw in the second quarter of 2009 bear market,” said Silverblatt.
And, there is plenty of room for companies to increase dividends and repurchases. Moody’s estimates U.S. nonfinancial companies are holding $1.48 trillion in cash and cash equivalents. With short-term interest rates holding near zero, these assets are generating little income, a concern of investors.
Qualcomm (Nasdaq: QCOM), which reported cash assets of $29.4 billion at the end of September, has made a concerted effort to use a portion of those funds for dividends and buybacks. At the end of the company’s fiscal year it announced a $5 billion stock repurchase plan. A previous buyback of $2.7 billion repurchased more than 40 million shares of Qualcomm stock.
In March of last year Qualcomm increased its quarterly cash dividend, which now offers a yield of 1.9 percent.
“This reflects our commitment to returning capital to stockholders while continuing to make substantial investments in new technologies and future growth opportunities,” said Dr. Paul Jacobs, CEO. “Since these programs began in 2003, we have retuned over $25 billion to stockholders through a combination of stock repurchases and cash dividends.”
Bottom line, companies will continue to share the wealth as long as revenues keep growing. However, any slowdown in the economy impacting profits could tighten the tap on cash flow to shareholders.