Dividend Increases Soar as Companies Return Excess Cash

By Monday, April 30, 2012

U.S. economyAs expected, there have been a lot of dividends increases from big, brand-name companies with excess cash on their books. New business investment is somewhat lagging given all the risks in the marketplace, so it’s much easier for companies to increase their dividends and/or initiate new stock market buybacks. This is, after all, what stock market investors’ want.

It’s pretty clear that the U.S. economy isn’t accelerating; it’s just slowly moving forward with an improving underpinning. What was evident in the recent gross domestic product (GDP) news was that the inflation rate is affecting GDP growth and it’s not only due to higher energy costs. Consumers have to spend more to attain the same amount of goods and that puts the brakes on economic growth.

For the most part, however, investor sentiment in the stock market remains positive and the corporate news is mostly good enough for institutional investors to be buying. And this is what they are buying—large-cap companies with increasing dividends.

We’ve had all kinds of increased dividends announcements from the big companies that you know, such as IBM (NYSE/IBM), Johnson & Johnson (NYSE/JNJ), American Express Company (NYSE/AXP), DuPont (NYSE/DD), ExxonMobil Corporation (NYSE/XOM), Procter & Gamble Co. (NYSE/PG), and the list goes on. (See Dividends: The Only Way to Keep the Mini Bull Market Alive.)

This makes the S&P 500 Index appropriately valued at 1,400 and, if the economic news holds relatively positive, we just might get another 10% in price appreciation from the stock market this year. Nothing should surprise you when it’s an election year. The Federal Reserve seems intent on keeping stock market investors happy.

Still, we’re not seeing consistency in the numbers, whether it’s regarding the economy or corporate earnings. Stock market leaders are staying stock market leaders, because they have solid operational leverage. Dividend paying stocks like Union Pacific Corporation (NYSE/UNP), IBM, The Southern Company (NYSE/SO) and Intel Corporation (NASDAQ/INTC) are great examples. But there are also a lot of companies that are struggling on a relative basis. Stock market bellwethers like Ford Motor Company (NYSE/F), Alcoa, Inc. (NYSE/AA) and Oracle Corporation (NASDAQ/ORCL) are lagging.

I actually think that retail shares are a great indicator for the health of the U.S. economy. As illustrated in the latest GDP report, consumer spending kept the numbers alive. Retail stocks don’t tend to pay dividends, but they obviously represent the consumer, who remains a very large part of the U.S. economy. Going forward, I think we’re just going to get more of the same—mixed news on the economy and more dividends increases from big-cap companies. It’s not full steam ahead, but low and slow.

About the Author, Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »