What this stock market needs is a really juicy 5% yield.
Instead, the dividend yield on stocks that make up the
Standard & Poor's 500
is down to a paltry 1.23%. Thunderation! The yield on the supposedly high-dividend stocks that make up the
Dow Jones Utility Average Index
is just 3.31%. Last week, the average yield on a three-month CD was 3.94% in comparison. Only 36 stocks out of the 500 in the S&P 500 paid out that high a dividend. That's just 7%.
Now, mind you, I'm not an income investor or even a growth-and-income investor, and I'm about 20 years away from making dividend yield (the cash dividend that a company pays out annually on each share of its stock divided by the share price) a big part of my stock picking. But I find the low level of dividends on common stocks troubling nonetheless. The current low dividend yield is a clear signal to me that we haven't put the worst excesses of the 1999-2000 stock market behind us.
Here's the problem that the numbers reveal to me: Too many CEOs continue to run the companies they temporarily head as if they owned them. Too many business strategies coming out of the executive suites are based on management empire-building and ego gratification. Building value for shareholders is simply not job No. 1 at too many U.S. companies (and don't get me started on the situation in the rest of the world).
The dividend yield is a traditional measure of stock market valuation. When the dividend yield sinks, it's a sign that the market might be getting overvalued because investors are paying more and more dollars per share for the dividends that those shares pay.
That's why as early as the mid-1990s, some market analysts began to warn that the stock market looked overvalued. For the years from 1946-1996, the median dividend yield was 3.75%. In the bull market of the 1990s, the dividend yield fell below that level in 1994 and kept on sinking.
Other market analysts at the time argued that the dividend yield was no longer a useful indicator. Dividends had fallen out of favor because these payouts are taxed twice -- once at the corporate level when the company makes a profit and once at the investor level when the shareholder pays income tax. Companies looked to share buybacks instead of dividends when they wanted to put "extra" cash to work. And investors looked to appreciating share prices for a larger and larger part of their investment gains. Whatever the logic of either side of that argument, dividend yields continued to fall year after year, but the stock market continued to climb.
What interests me now, however, is what has happened to the dividend yield since the bubble broke. Or maybe it's better to say, what hasn't happened. In May 2000, the dividend yield on the S&P 500 was 1.2%, just 0.03 percentage points below where it stands today. And since the S&P 500 index is actually down about 12% over the past year, the rather constant dividend yield over that period means that the actual dividends paid per share have fallen -- from $16.54 for the stocks in the index in May 2000 to $15.72 in May 2001.
Over the long haul, calculates Jeremy Siegel in his book
Stocks for the Long Run,
the real return on common stock has been a remarkably consistent 7% a year. Part of that return has come from dividends and part from real (that is, corrected for inflation) earnings growth per share.
When dividends have climbed, the contribution from earnings growth has declined. In periods when dividends have been low, earnings growth has been high. That makes good sense because dollars not paid out in dividends get reinvested in the company and lead to future earnings growth.
From that point of view, the low dividend yields of the 1990s are readily understandable. The decade was a period of extraordinary corporate profitability. Companies should have been stinting on dividends in order to reinvest in their businesses because those business were generating historically outsized earnings.
Overcoming Growth Worship
That all came crashing down around CEOs and investors in 2000, however, when it started to become clear that (1) this period of extremely high earnings growth was coming to an end, and that (2) inflated by various accounting mistakes, intentional and otherwise, the growth hadn't been quite as high as everybody thought it was anyway.
, for example, once customers began to cancel orders, the company discovered that those customers had indeed double and triple ordered to make sure they got the parts they needed when supplies were tight. Instead of canceling just one $100 million order, a customer wound up canceling three identical $100 million orders. Growth hadn't been as fast as the ledger of orders showed.
With the potential for faster and faster earnings growth driving CEOs, every company had to be a growth company. Take the money from a maturing business and make a daring acquisition with sky's-the-limit growth, as
did in cable TV and wireless. Put unbelievable sums of money into developing and selling a new product, even in a slow-growth market that your company already dominates, as
did with its Mach 3 razor blade. Even if the numbers didn't add up, spend billions to leapfrog competitors with a new technology, as
did with Iridium, if only because raising money to invest in growth opportunities was so easy.
The landscape is now littered with the monuments to this overworship of growth -- the billions of debt at AT&T and Motorola, for example. And shareholders are still adding up their losses from these reckless corporate gambles.
Those disasters should have sobered CEOs, investment bankers and investors, especially now that it looks as if the era of above-average earnings growth is behind us for a while. We ought to be seeing a gradual shift toward corporate strategies that are focused on lower but sustainable earnings growth.
Cutting costs by eliminating redundancies, rather than chasing grand strategic visions, should be motivating acquisitions. Companies should be seeking to improve their competitive position by a merger, not by hoping to crush all opposition and totally dominate a market. CEOs ought to be content to run a mature business well, rather than think it's beneath them. And if earnings growth rates are slowing, companies ought to be adopting financial strategies to increase the return to shareholders through methods such as dividend increases, or if the double tax bite is really an issue in this era of tax-sheltered IRAs, Keoghs and 401(k)s, through share buybacks that increase the growth of earnings per share by reducing the number of shares on the market.
I can see some signs that the financial markets are adjusting to a likely era of lower earnings growth -- i.e., 5% real growth, instead of 10% or 12%. The May 29 breakup of a possible deal between
-- if indeed it is dead -- is one of these hopeful signs. Here was an ego-gratifying deal if ever I've seen one. For Alcatel CEO Serge Tchuruk, buying and turning around Lucent could have sealed his reputation as the turnaround artist of the decade. Not only would he have transformed Alcatel from an inefficient grab bag of companies (Alcatel once made wine, for example) into a global challenger able to battle the Lucents and the
, but with the deal he would have put Alcatel in a position to challenge the No. 1 spot now held by Nortel.
Of course, the odds are, at best, that turning Lucent around would have taken so much time and energy that Alcatel would have suffered. At worst, Lucent would have turned out to be such an albatross around Alcatel's neck that the deal would have dragged down both companies. Walking away, if that is indeed what Alcatel has done, is a sign that some companies have decided that a growth-at-all-costs strategy is no longer the best plan.
But I don't see enough signs like these. Managements in and out of the technology sector have been slow to step up their plans to buy back shares. What are they waiting for -- lower share prices? And dividend increases? Forget it. Look at the dividend yields on such mature businesses as
at 1.5% and Gillette at 2.3%. And remember the days when AT&T was an income stock? Today's dividend yield is 0.7%.
Too many CEOs think they can still pull yesterday's growth out of their hats if they just try one more trick. AT&T, for example, is still hoping that its plan to break up, spin out and distribute -- which will result in a wireless company, a broadband company, a consumer long-distance company and a business communications company -- will solve the company's growth problem and earn the shares a growth-stock multiple.
Now, there's nothing wrong in my book with restructuring assets in order to bring out hidden value, but the value is supposed to benefit shareholders -- not gratify the ego of managers who want to run universally admired growth companies. Many recent growth restructurings seem to have lost sight of this. Many of the restructuring tools so popular recently, in fact, make it much too easy to sacrifice shareholder interest to corporate strategic goals.
The Perils of Investing in Tracking Stocks
Nothing in the past few years has been as unfriendly to shareholders as the tracking stock, with its lack of accountability to an independent board and its inherent inability to protect shareholder rights from the effects of policies originated at the parent company for the benefit of the parent company. One of the worst features of the AT&T plan, to my mind, is that it uses so many tracking stocks at intermediate stages to get to the final breakup. A tracking stock is an open invitation to deals that are against the best interests of shareholders of the tracking stock.
Think that's an overstatement? Take a look at the way the battle for
is shaping up. Hughes was spun out of
as a tracking stock. Now General Motors wants to sell its 30% share of the company. So far, fair enough.
But General Motors wants cash for its piece of Hughes, and that has led it to favor a bid from a group headed by Rupert Murdoch's
. Now, News Corp. might not be the highest bidder or the best partner for Hughes in the eyes of other shareholders, but those shareholders don't have anyone to speak for them despite their investment in the tracking stock. Hughes Chairman and CEO Michael Smith, who favored looking for another partner and had actually met with Charlie Ergen, chairman of
, abruptly "retired" last week. His replacement as chairman, Harry Pearce, a GM vice chairman, is known to favor News Corp. The new CEO, Jack Shaw, is another former GM vice chairman. Getting the best deal for Hughes shareholders (at least, those other than General Motors' shareholders) doesn't seem to be a goal in all this corporate chair switching.
Old stock markets die hard. Stocks, as we're learning, don't immediately bounce off the bottom and start another bull rally. Inventories don't get corrected overnight. It takes months before all the companies that will go into bankruptcy have filed their papers.
It's the same with styles of corporate management and the assumptions that form corporate strategies. After bingeing on growth, this market has as big a hangover in the executive suite as it does on the trading floor.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column.
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