Why Dividend Increases and Stock Buybacks Will Continue

Why Dividend Increases and Stock BuybacksA number of large-cap, international companies reported third-quarter earnings that were below expectations. On the stock market, their shares went down accordingly and so did earnings outlooks for the rest of the year. But for a number of these companies, Wall Street analysts are now raising their earnings outlooks for the fourth quarter of 2012 and fiscal 2013.

One company where the increased earnings outlooks have been pronounced is E. I. du Pont de Nemours and Company (NYSE/DD). Ever since its third-quarter earnings report, du Pont’s shares have being going down in value on the stock market. The stock recently bounced off its 52-week low, but earnings estimates have been going up across the board for this year, the first quarter of 2013, and all of next year. The company’s stock market chart is below:

Dupont Company Chart

Chart courtesy of www.StockCharts.com


While business conditions aren’t likely to have changed much over the third quarter of 2012, blue chips have been so cautious with their earnings outlooks that the Street is now betting on “outperformance.” As we all know, corporate earnings are managed, but somehow the systems seem to work. Besides, all investors really care about is growth.

Another large-cap that’s experience a revival in earnings estimates is NIKE, Inc. (NYSE/NKE). With slow economic growth in Europe and China, the company’s earnings weren’t that great in its latest quarter. (See “World Hurting U.S. Revenues, But U.S. Economy Holding up Earnings.”) On the stock market, NIKE has been in consolidation for the last six months. The company’s next earnings report comes out today, and it will be really interesting to see what the company has to say about business conditions. NIKE’s stock market chart is featured below:

Nike Inc Chart

Chart courtesy of www.StockCharts.com

There’s a little bit of holiday momentum in the stock market’s trading action. It’s well deserved, as the market’s been in consolidation for quite a while. Because Europe is still toying with recession, it’s reasonable to expect fourth-quarter earnings will be fairly flat among many international large-caps. But what this stock market wants, in my view, is certainty—stability of operations in the age of austerity—and I think we’re going to see it in the numbers.

Corporate balance sheets, especially among large-cap companies, are extremely healthy. Artificially low interest rates have also been helpful. So it won’t take much for earnings to bump up on any uptick in the economy. For the most part, I’d say the stock market is in fairly good shape. There isn’t a lot of real economic growth around, but corporations are doing their part to keep investors happy.

I’m confident we will see a lot of increased dividends and share buyback programs come fourth-quarter earnings season. Cash balances are strong, and there’s nothing easier for a big company to do than to return more cash to shareholders. It would be useful to see companies embark on more capital spending, but this won’t happen until there’s more certainty in the world. Policy makers can’t act soon enough.