VideoSince the 1980s, companies in the S&P 500 that pay dividends to their stockholders have been a vanishing breed. But this year, that trend has turned around—in a big way. Although the numbers change on a daily basis, as of the end of October, 19 companies on the index had initiated dividends this year, including such well-known names as Best Buy, Microsoft, and RadioShack. "Standard & Poor's has been tracking the steady decrease in dividend payers since the 1980s, and this year marks the first substantial increase in two decades," says equity market analyst Howard Silverblatt.
Not only are more firms paying dividends, more are increasing their dividend rates as well: the number of firms hiking their rates jumped more than 9 percent from last year, to 193 from 177. And 26 of those boosted their rates more than once this year. "We're not talking about small numbers; the average is 19.5 percent," declares Silverblatt. United Technologies, for instance, pumped up its rate 10.2 percent in April and another 29.6 percent in September. Citigroup cranked up its rate 11.1 percent in January and 75 percent in July. And Kinder Morgan elevated its rate 50 percent in January and 166.7 percent in June.
One of the driving factors is the federal tax cut that took effect in May. Praxair Inc., a Danbury, Conn., producer of industrial gases, for example, increased its dividend rate twice this year—13.2 percent in January and 25.6 percent in October—in large part because of that legislation. "It caused us to reconsider increasing the overall payout ratio to a higher level," observes CFO James S. Sawyer.
With the legislation—which reduced the dividend tax rate to 15 percent—dividends have gained a new cachet in the executive suite, says Sawyer. When dividends were taxed as ordinary income, he explains, there was an incentive to buy back stock rather than pay dividends, because the tax rates on capital gains and dividends were the same. Now, while dividends and long-term capital gains are taxed at the same rate, he says, "there's a slight advantage to dividends over capital gains, because short-term capital gains are taxed at a higher rate."
Silverblatt expects dividend rates to continue to rise for the foreseeable future. "The earnings are there, the ability to pay is there, and the yields are historically low," he says. —John P. Mello Jr.
Follow the Directions
Calendar-year companies have until New Year's Eve to comply with Fin 46 and put variable-interest entities (formerly special-purpose entities) on their balance sheets. The rule—a response to Enron's depredations—was supposed to take effect in the third quarter, but the original deadline was extended on October 8, after it became clear that some companies were still puzzled.
The will-o'-the-wisps of the business world, VIEs are ethereal paper companies used to hold assets for such purposes as structured financing. But the same murky characteristics that made them useful for hiding Enron's debt also make them tricky to define, which forced the the Financial Accounting Standards Board to issue clarifications on Halloween.
"It's complicated to apply an economic concept to these structures," explains FASB chairman Robert Herz, "but we had to do it because trillions of dollars were being hidden off the books." Asked if recent restructuring by banks to keep VIEs off their books was in keeping with the underlying principle of Fin 46, Herz noted that banks "took further steps to deconsolidate the risk, so at least directionally, they went in the right direction." —Tim Reason
The Ties That Bind
Do commercial banks illegally tie the availability of corporate credit to purchases of investment-banking services? Perhaps, concludes an October report by the General Accounting Office.
The GAO found little documentary evidence of tying, because, not surprisingly, "credit negotiations are conducted orally." It also noted that companies are reluctant to report tying, both for fear of retribution and because they aren't sure when it's illegal.
Yet the 56-page report recommended improving the enforcement of antitying laws and was critical of a recent joint study by the Federal Reserve and the Office of the Comptroller of the Currency, which found no unlawful tying and concluded that banks had taken adequate steps to prevent it. The GAO said the bank regulators failed to broadly analyze bank transactions for evidence of tying and didn't talk to corporate borrowers at all.
"We were surprised they could come to that conclusion without talking to any corporate practitioners," says James A. Kaitz, CEO of the Association for Financial Professionals. In March, an AFP survey of 700 members found that 56 percent of companies with more than $1 billion in revenues had been denied credit or had their credit terms changed because they didn't award the bank other financial business.
Tying credit to traditional banking services is not illegal, and the AFP drew no legal conclusions from its survey. However, of the five services that companies said their banks had tied to credit availability, only one, cash management, was not an investment-banking service.
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