Investing

Has the Endless Growth of Dividends and Buybacks Peaked?

Apple Inc. (NASDAQ: AAPL) is now embarking on a massive buyback plan and a dividend hike. Our initial take was that the priority was too much on buybacks and should be more on dividends. Either way, Apple suffers the same problem as many great companies with huge global cash balances: its cash is largely overseas. Apple recently had to do another debt offering and one of the uses of capital was stated as helping in dividend and buyback payments.

Apple is the most profitable of all companies, but even with its cash balance of more than $190 billion, its dividend yield is still only 1.6%. Carl Icahn seemed too ambitious in his aim of getting Apple to $240 per share.

Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) have been great payers in the oil patch, as has Kinder Morgan Inc. (NYSE: KMI). The problem is that oil’s price drop will not be a boom town in the years ahead, even for the best-run oil giants. Exxon Mobil raised its dividend to $0.73 from $0.69, but rival Chevron kept its dividend static at $1.07 for the fifth quarter in a row.

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Kinder Morgan has raised its dividend handily, but when the company committed to the 10% payout hike per year, oil was much higher than even the recovery level seen now. Chevron also backed off of share buybacks. In addition, S&P just maintained its AAA rating on Exxon Mobil with a “stable” outlook, but what stood out at least a bit was that S&P moved the liquidity assessment to “adequate” from “strong” based on liquidity now expected to exceed uses by a ratio of 1.2 in the next 12 to 18 months.

Exxon is considered one of our top 10 stocks for the next decade, and Kinder Morgan was a runner-up. With low commodity prices, at least the oil patch leaders are not suffering the 84% dividend cut like Freeport-McMoRan

What about General Electric Co. (NYSE: GE)? It is a conglomerate that has been very eager to raise its dividend to get back to the peak days. The $0.23 dividend of today compares to a peak of $0.31, and now with all that is going on with massive buybacks after financial asset sales, repatriated cash from overseas, a coming completion of the Synchrony Financial (NYSE: SYF) spin-off and the rest, it looks like investors are likely to have to wait until late in 2016 or after for dividend growth to resume.

This is certainly no slam against GE, on the surface, and we even once opined that GE would be able to get away with saying that its dividend was unofficially higher after it exits so much financial dependence operations. GE is also one of our 10 companies to own for the next decade. It just may take some time for all the dust to settle and the buybacks to be further along — and hopefully more earnings growth as an industrial and post-financial conglomerate — before GE investors can expect serious dividend hikes to resume.

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Wynn Resorts Ltd. (NASDAQ: WYNN) recently had to cut its dividend. While we warned that Wynn could be among several at-risk dividends, we frankly cannot blame the company for cutting the dividend at all. Casino stocks live in booms and busts, and they just cannot always continue a boom-time dividend when they run into business headwinds. These companies do not want to see their credit metrics go south, and casinos sometimes need to save cash for a rainy day.

Using a casino may not seem like a fair comparison to broad dividend cuts, particularly if we think it was OK for them to cut their payouts, but they are one of the top casino and event destinations for Las Vegas and internationally.