Dividends Going Up Because Companies Don’t Want to Invest

Dividends Going UpThere is now more evidence that companies with huge cash hoards are returning the money to shareholders, rather than making any bold new investments themselves. Last Friday, General Electric Company (NYSE/GE) announced that it would increase its quarterly dividend to $0.19 a share, up from $0.17, and it authorized an increase in the amount of shares it can repurchase to $10.0 billion by the end of 2015.

On the stock market, General Electric (GE) has been recovering pretty well, but since the financial crisis, the stock has underperformed the main stock market indices. Investors all love dividend increases, and I’m the first to applaud the company for doing so. But the return of excess cash in the form of dividends and share buybacks also represents the unwillingness of companies to make any bold new investments in its operations. It’s a very uncertain world out there, and companies aren’t willing to bet like they used too. GE’s stock market chart is below:

GE General Electric Co. stock market chart

Chart courtesy of www.StockCharts.com

GE has been a solid dividend payer but a terrible stock market investment over the last 12 years. The company’s heyday on the stock market, it would seem, was the 20 years leading up to 2000, when the stock appreciated 58-fold, not including dividends. Today, the stock is trading today at less than half of its record high, which is not the kind of blue-chip performance you expect from such a large company. (See “Dividend Yields Going Up—the Outlook for Stocks, Not So Good.”)

Just like last quarter, there’s a very high chance of a lot more dividend hikes when fourth-quarter earnings season begins. Even if earnings aren’t great, the company will raise its dividends to keep shareholders happy. The cash story is a good one for investors but not for the Main Street economy. GE’s cash position took off last year, but the company isn’t really growing, so another dividend hike from this business probably won’t happen for another couple of years.

After the stock market tanked during the financial crisis in 2008 and 2009, there must have been a lot of soul-searching at the corporate level, because companies are clearly not willing to take big risks in this environment. It’s a similar story with individuals. Sovereign debt crises, deficits, unemployment, real estate prices, political policy (or a lack thereof), war—it all wears on the system, and just like I’ve been writing that a highly conservative stance is warranted with the stock market and other investments, corporations are doing this themselves.

We’ll get a bounce in anticipation of a deal on the fiscal cliff. There are no good taxes, but practically, I think it’s better for tax policy to encourage saving and investing, while taxing income. The stock market really seems stuck here, with little prospect of increased earnings expectations in the first half of 2013. The situation in the eurozone remains the same; however, recent data from China are encouraging.

I expect so little from the stock market in 2013 that the only expectation I have is the return from dividends. The next couple of years are going to be tough for the U.S. economy, as the system is still in the process of balancing itself out after all its excess. Real economic growth is now a difficult thing to come by.