Investing

Time for Investors to Worry About Too Much Dividend Growth

The fear is not just tied to dividend growth. The report noted that buying back shares is similar to paying dividends. Moody’s went on further to say that share buyback activity relates to company-specific attributes, and that it is not affected by expansionary monetary policies. Moody’s said:

Only about 40% of the companies we looked at routinely buy back shares, and these companies have a common set of attributes.

So, 24/7 Wall St. wants to point out what investors should start to consider here, aside from the Moody’s warning — and why some companies may have no choice in this matter. Again, S&P said dividend growth will continue at the same time that Moody’s is worried about credit quality from this stretching of corporate governance behind dividend policies.

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What’s important here is that there are some realistic conundrums that corporations face ahead. The first consideration is the death of real economic growth. Then, what about the pressure from regular investors? What about activist investor pressure? What about the fear of the backlash if a company cuts its dividend? Here are a few tidbits to consider on this:

  • Individual investors love dividend growth, like the so-called Dividend Aristocrats. That is, S&P 500 index members that have increased their dividend payments each year for at least 25 years.
  • When you see dividend payout ratios reaching 70%, 80% and even 90% of their income — not counting real estate investment trusts (REITs) and master limited partnerships (MLPs) — the harsh reality is that these companies seem obviously to be stretching themselves.
  • Activists have pressured companies to take on debt at low interest rates and to pay big dividends and conduct large stock buyback plans. This may drive the share prices higher now, but after the end of the plan’s effectiveness has been reached, then you have a company that has more leverage and that fundamentally did not do anything for the next 20 years of its business.
  • And the death of growth: Many companies are having a hard time growing revenue organically, and the world still has too much unused capacity. Europe is in negative interest rates, and Europe and Japan are both heavily into quantitative easing. China’s growth and production have slowed. The United States is still willing to ship jobs out of the country. Sadly, but somewhat understandably, Corporate America feels very little enticement to spend on new facilities and make major investments.

Now, what about some tempering of fear and expectations about dividends stretching balance sheets? Investors should of course not ignore the warning here. It should be obvious, but perhaps this should not create a panic situation. It may take years before the full effect of how corporate governance is realized — and there is the notion that it may turn out to be no problem at all.

Stay tuned.

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