Dividends are back.
Eleven of Iowa?s 21 largest publicly traded companies raised their dividends an average of 17 percent during the past year, with Des Moines-based Meredith Corp. initiating a 50 percent boost in October and West Des Moines insurer FBL Financial Group announcing a 60 percent increase last month.
?More and more companies are feeling more and more confident about their earnings to the point where they are reinstating their normal dividend policies,? said James Paulsen, chief investment strategist for Wells Capital Management in Minneapolis.
?Presumably, these firms are accumulating a lot of free cash flow and it?s time to do something with it,? said Travis Sapp, an associate professor of finance at Iowa State University.
?Free cash flow? is money that?s available after normal operating and capital expenses. In the past, a lot of it was used for plant expansions and acquisitions. But the economic downturn changed that by severely limiting growth opportunities. So, today, more free cash flow goes to pay dividends and repurchase company stock.
The recent pattern of rising dividends, which includes companies as diverse as Walt Disney Co., Deere and Wells Fargo, bucks a three-decade trend in the other direction, said ISU?s Sapp.
Nonetheless, higher dividends are good news for fixed-income investors as they struggle to keep pace with rising inflation and a Consumer Price Index that has climbed above 3 percent at a time when the return on most bank deposits and government bonds is in the 1-2 percent range.
By contrast, as of last week, seven of Iowa?s publicly traded companies were paying dividends with yields above 3 percent, led by Meredith?s 5.1 percent yield.
Seventeen of Iowa?s 21 largest publicly traded companies pay a dividend.
That?s unusual, Sapp said, because many companies don?t.
Dividends fell out of favor during the technology boom and deregulation periods of the 1990s and early 2000s with the result that today ?fewer companies are choosing to initiate dividends,? he said.
Companies pay dividends for many reasons, Paulsen said, but a common one is to maintain or boost stock prices.
A good example is Meredith, the Des Moines-based media company that publishes women?s magazines and owns 13 TV stations.
Since Meredith announced a 50 percent increase in its quarterly dividend on Oct. 25, its share price has increased more than 20 percent when the major market indexes were flat to up 2 percent.
Not all of Meredith?s gain can be attributed to the dividend. In recent weeks, the media company received favorable mentions in financial publications, including Barron?s and Bloomberg. Also, its dividend announcement was coupled with a $100 million share buy-back.
The reverse is also true. Sapp said there are plenty of examples of companies whose share prices tanked after they cut or eliminated dividends.
Before the economy went sour, dividends were not popular with many corporate executives, Sapp said. He cited a pre-2008 survey that found a large number of chief executives and chief financial officers agreed with a statement that essentially said: ?If we could do it over again, we don?t want to get locked in to dividend expectations; we would manage it either through one-time special pay outs or stock repurchases.?
But that was then, and this is now.
The last time dividend yields were as high as they are today was in early 2009, when the stock market collapse had already destroyed share prices but trailing dividend payouts had not yet caught up. In the months that followed, there were massive dividend cuts and many companies even eliminated dividends entirely.
?We?re on the other side of that equation now,? Paulsen said, meaning that current dividend yields should be sustainable going forward.
Many, but not all, of the Iowa companies that increased dividends in the past year were playing catch-up for cuts they made in 2008 or 2009.
FBL Financial Group is a good example. The West Des Moines-based insurer announced a 60 percent dividend increase last month, the largest of any Iowa company this year. The announcement raised FBL?s quarterly payout from 6.25 cents a share to 10 cents a share, but was still less than the 12.5 cents dividend paid before 2009.
But even the 10 cent per quarter rate produces a small yield of about 1.2 percent, placing FBL?s payout in the bottom half of yields for publicly traded Iowa companies.
Something else to keep in mind, Paulsen said, is that current dividend payouts amount to only about 27 percent of trailing earnings for S&P 500 companies. That?s historically low, he said, noting that payouts of 50 percent and more were common before the early 1990s.
The latest quarterly dividend at West Bancorp. amounts to about 33 percent of earnings, but David Nelson, president of the bank holding company, expects that to climb in coming years.
The bank has a history of high payouts that was interrupted when it had to cut and then eliminate its dividend in 2009.
But that?s over, Nelson said, and the new dividend, which increased 40 percent to 7 cents a share in November, puts the bank back on the path to meeting shareholder expectations.
So far this year, West Bancorp.?s stock is up nearly 25 percent, and the new dividend provides a yield of about 3 percent.
?Most of our shareholders want ? both income and appreciation,? Nelson said.
