Dividend Climate Getting Nasty
For every five companies that raised their dividends in the six months ended June, another six cut their payouts.
If the trend continues, 2009 will be the first year dividend cuts have outnumbered increases since at least 1955. During that 54-year span, annual dividend increases outnumbered decreases by an average of about 15 to 1.
Of the roughly 7,000 stocks Standard & Poor’s tracks, a record 617 reduced or eliminated their payout in the first six months of 2009, more than all of the cuts made between 2002 and 2007. Another round of cuts could occur in August and September, as companies review their 2010 budgets.
With dividend growth harder to find, investors should look at dividends as a percentage of cash flow. Operating cash flow equals net income plus noncash expenses such as depreciation and amortization, plus the change in value of other assets and liabilities. Free cash flow — operating cash flow minus dividends and capital expenditures — reflects a company’s excess funds, which can be used for dividend increases.
In the past four fiscal quarters, the average dividend-paying stock in the S&P 500 Index has paid dividends equal to 27% of operating cash flow and 71% of free cash flow, as shown in the chart below. Companies with ratios above 500% or negative cash flows are excluded. The percentage of cash flow paid out in dividends has increased from last year, suggesting that more companies may be straining to maintain the payout.
However, the 12 stocks in the table below have historically grown their payments. All 12, including the two reviewed below, also commit a smaller-than-average portion of cash flow to the dividend. These companies seem likely to continue raising their dividends.
Aflac ($29; AFL) maintains a robust balance sheet and generates reliable cash flow capable of growing the dividend. Cash assets of $2.21 billion, or $4.73 per share, have more than doubled in the past year and exceed long-term debt by $636 million. Both operating and free cash flow have climbed 16% over the past 12 months. Aflac has increased its payout for 26 consecutive years, including a 17% hike in March. Aflac, which yields 3.8%, is a Long-Term Buy.
Lockheed Martin ($78; LMT), with annualized dividend growth of 16% over the past five years, typically announces increases in September. Lockheed pays $0.57 per share quarterly, yielding 2.9%. The company has the financial flexibility to support higher payouts. Lockheed holds $2.38 billion in cash, or $6.13 per share, and free cash flow jumped 79% in the March quarter and 71% over the last 12 months. Lockheed Martin is a Long-Term Buy.