
Dividend-to-Earnings Patterns May Signal a Looming Recession
Hefty dividends are not always an indicator of corporate health.
In fact, Warren Buffett has long maintained that his Berkshire Hathaway (BRK.A) - Get Report (BRK.B) - Get Report investment giant has made a policy out of not paying dividends precisely because companies that dole out cash to shareholders could be indicating a lack of alternative investment opportunities.
Rising dividends could also signal that a recession is on the horizon, especially if corporate profits are not advancing apace with corporate payouts.
While S&P 500 dividends dipped moderately year over year in the first quarter -- following seven consecutive quarters of gains -- the $385 billion shelled out over the past 12 months marks is the latest progression of a steady climb from 2008 levels.
In combination with buybacks, the first quarter set a new record at $258 billion, surpassing the record set in last year's fourth quarter of $245 billion. The 12-month period ending in March, also set a new record at $975 billion in buybacks and dividends.
But with dividends on the rise and corporate profits among S&P 500 companies set to decline 5.1% in June this year, from a 2.8% estimate in March, the incongruity could spell trouble, according to Real Money's Chris Versace.
"If earnings do come in negative, it will be the first time the index has recorded five consecutive quarters of declining year-over-year earnings since the third quarter of 2008 through the third quarter of 2009," he said. "Meanwhile, the index keeps struggling to reach news highs."
Real Money's David Peltier noted it may now be time for dividend-hungry investors to focus on stocks that are capable of generating consistent earnings "rather than just focusing on the highest yields available," he said in a Tuesday email.
The pattern also holds true across the pond, with the FTSE 350 paying out more dividends in 2015 than profits for the first time since the 2008 financial crisis. The ratio of dividends to profits, or coverage ratio, of the top 350 U.K companies is also growing alarmingly narrow, according to Financial News reporter Bernard Goyder.
At 0.98, the average coverage ratio among the FTSE 350 is at its lowest level since the third quarter of 2009, noting that post-recession coverage ratios peaked at 2.5 in mid-2011, Goyder added.
-- Aidan Dougherty contributed to this report.










