Has the Endless Growth of Dividends and Buybacks Peaked?

Procter & Gamble Co. (NYSE: PG) may have raised dividends for years and may be a great brand. After all, it dates back to the 1800s, and its recent dividend raise was the 59th consecutive year it raised the payout. The problem here is that P&G raised its dividend by only 3%. That may be because P&G already yielded over 3% at the time, because there is only so high that companies really have to go in a yield. P&G is in the process of jettisoning dozens of lower growth brands.

P&G has a massive currency headwind, with a strong dollar that just comes right off the top line and bottom line. Now sales are expected to be down 3% or 4%, and organic earnings growth could be an issue, depending on how its restructuring goes.

Macy’s Inc. (NYSE: M) is another example of dividend and buyback growth that is being used either by the success of the past or by increased leverage ahead. The king of mall-based department stores recently raised its dividend by more than 10%, from $0.3125 to $0.36, after earnings fell to $0.56 from $0.60 per share. This sounds like enough earnings per share coverage on the surface, but Macy’s also boosted its buyback by $1.5 billion, a move that leaves a total of $2.1 billion available for buying back common shares. With earnings having declined and a prediction of a mere 2% in comparable sales growth (and 1% total expected sales growth), imagine what happens to dividend growth and buybacks if things do not go as planned. The issue is not the most recent quarterly number, because annual earnings per share guidance was offered at $4.70 to $4.80 per share, but it is the lack of growth and the sensitivity that large department stores have to economic growth and slowing trends.

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Macy’s is very well run and it may not have to stall on the dividend growth immediately, but any more disappointing economic trends on retail sales or consumer spending habits could crimp the company’s ability and desire to shovel billions back to shareholders.

Then there is the case of rising dividends in telecom and utilities.

AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) are both being hampered by a four-way price war among wireless carriers. The DirecTV (NASDAQ: DTV) acquisition by AT&T (if approved) may help support much more dividend growth. After all, DirecTV is one-fourth the size of AT&T, and it now pays no dividend, leaving some $5.1 billion in operating income and $2.76 billion in net income (2014 figures) that can go toward dividends ahead.

Utilities have been great performers, almost to the point that investors had turned to utilities to be their replacement investments for certificates of deposit (CDs) after their yields went to 0.2% or so. But now utilities frequently yield less than 4% when they used to yield over 5%. What happens there when interest rates rise, and when their substantial borrowing costs rise?

If investors want to focus on exchange traded funds (ETFS) rather than just individual stocks, they might be able to avoid some of the individual issues. Still, these would not be immune to market pressure or if there is pressure on companies regarding dividend growth and continual stock buybacks. ProShares S&P 500 Dividend Aristocrats (NYSEMKT: NOBL) and Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) are two leaders for dividend growth in ETFs, and the PowerShares Buyback Achievers ETF (NYSEMKT: PKW) and AdvisorShares TrimTabs Float Shrink ETF (NYSEMKT: TTFS) are the leaders for stock buyback ETFs.

24/7 Wall St. is not calling this the end of dividends. It is also not the end of stock buybacks. That being said, there are concerns brewing that will require some serious underlying issues to change for the rate of dividend growth and endless buyback expectations. A coming interest rate hike cycle from the Federal Reserve is only one small piece of a much larger puzzle when it comes to dividend and buyback expectations ahead.

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