Higher Dividends Would Ease Concerns

Many stockholders are looking for higher dividends to alleviate their concerns stock prices have been bid up too high.

The dividend yield of the stock market, as measured by the ratio of annual dividends to stock prices of the Standard & Poor’s 500 stocks, fell throughout 1995 to 2.3 percent from 2.9 percent at the end of 1994.

Many market commentators, quoting historical trends, worry that falling dividend yields mean stock prices are too high. Another way to look at the data is to say dividends are too low, which might well be the viewpoint of investors relying on dividends for income.

Companies’ decisions about paying out cash dividends to shareholders depend on many factors. Blue-chip companies with good dividend track records do not tamper with their payout policies lightly. Indeed, an unexpected increase in dividends, as well as an unexpected decrease, is a caution flag to investors.

Often, companies attempt to keep their dividend payouts at a constant level compared to earnings. Sometimes, companies attempt to keep the dividend constant, even if earnings are fluctuating.

In any case, the amount of dividend payout generally depends on the company’s ability to pay and the expectations of shareholders. Another factor that may come into play this year is the options the company has for the cash it collects.

Rao Chalasani, an investment strategist in Chicago, sees higher dividend payouts as one of the characteristics of the 1996 stock market.

Here’s his reasoning: stock prices are generally high, which makes buying back shares an expensive alternative to distributing cash to shareholders; opportunities to reinvest in the business may be reduced this year because of moderating profit growth and economic sluggishness.

Chalasani expects dividend increases this year to triple the historic rate of 4 percent.

Two widely followed companies that boosted dividends recently were General Electric and Citicorp. Last month, GE declared a quarterly dividend increase to 46 cents per share from 41 cents. However, the increase does not mean GE plans to pay out a greater percentage of its profits. Analysts on average expect GE to earn $4.34 per share this year. A quarterly dividend of 46 cents would equal the 42 percent of earnings paid in dividends last year.

Citicorp two weeks ago declared an increase in the quarterly dividend to 45 cents per share from 30 cents.

Estimating Citicorp’s 1996 dividend payout ratio is difficult, because earnings per share forecasts vary widely for the banking giant. It’s worth noting, however, that Citicorp’s dividend was suspended from October 1991 to June 1994 and resumed at a rate of 15 cents a quarter.

It’s risky to try to forecast changes in dividend payouts. For example, Motorola’s payout ratio has dropped to about 14 percent of earnings in 1995 from 20 percent in 1990. If the cellular and wireless business is sluggish, might Motorola decide to boost its payout ratio and increase its 10-cent quarterly dividend?

Who knows? The certainty: executives will face conflicting market reactions.