Dividends and the Lost Decade

In the United States, Exxon Mobil and IBM announced dividend increases last week, boosting the cash payout to shareholders by 4.8% and 18.2%, respectively. Other prominent firms augmenting their dividends over the last month include Conoco Phillips (10.0%), Costco Wholesale (13.9%), Entergy (10.6%), Johnson & Johnson (10.2%), Pepsico (6.7%), TJX Companies, parent of Marshalls and T.J. Maxx, (25.0%), Travelers Companies (9.1%), and W.W. Grainger (17.4%).

It’s no secret that large cap shares have been among the poorest performing asset classes over the last ten years or so. In a distressing number of cases, much of the poor performance can be attributed to poor management or outright fraud. But there are many more examples of company managements that have done an admirable job of generating dividends for shareholders, but whose stock prices have marched to a different drummer. Procter & Gamble, for example, has tripled its dividend over the past ten years, but the share price is only 7% higher than its peak in March 2000. Kimberly-Clark has diapered enough babies in the past decade to boost its dividend by 144%, but its current share price is 15% lower. Johnson & Johnson has boosted the dividend like clockwork for thirty-eight consecutive years, but the share price hasn’t budged since 2002.

What do we make of this? As economist Herb Stein once observed, if something can’t go on forever, it won’t. If companies can continue to generate higher earnings and dividends far into the future, it’s hard to imagine a world where investors refuse indefinitely to put a higher price tag on this growing cash stream.

Anecdotal evidence suggests that investors are currently more enthusiastic about the outlook for bonds than for equities, and it would be a shame if investors abandoned the wealth-generating properties of equities based on their most recent ten-year experience.

Thanks go to Weston J. Wellington, Vice President, Dimensional Fund Advisors for his insightful comments.