Dividends: Are companies growing more confident?

24th April 2012

Certainly, dividend growth is usually taken as a sign of corporate strength. Dividend payouts usually reflect confidence in the future of a business and demand reasonable cash flow to support them. Peter Temple on his iii blog says that there are signs that corporate confidence is improving: "According to figures from the Institute of Practitioners in Advertising (IPA), we are seeing a rise in UK business confidence numbers to the point where they are positive. More marketing budgets are being revised up than down, and marketing spending is increasing. Internet advertising is being revised upwards the greatest extent of all, at the expense of more conventional media."

Where's the data?

This view is supported by data from the British Chamber of Commerce (BCC) announced in early April. Its Quarterly Economic Survey (QES) takes in views from 8,000 businesses across the UK and showed that "almost all the key national balances have strengthened in Q1, for both manufacturing and services, and are now much stronger than during the worst phase of the recent recession…The manufacturing and service sector balances for home deliveries and forward-looking orders rose to the strongest levels since Q2 2011. This is a repeating theme throughout this quarter."

But it is also because investors have started to demand higher payments. Sonja Laud, fund manager, Global Equity Income at Schroders, says: "With yield compression in bond markets having such a savage effect on investors' income, there has been an emerging interest in alternative income-generating investments. So it follows that the benefits of equity income investing are recapturing investors' attention.

"With capital appreciation accounting for the bulk of equity returns during the bull markets of the 1980s and 1990s, investors were willing to forsake dividends as share prices soared. However, with greater volatility in markets becoming a more entrenched feature, the unpredictability of equity market returns today is making it more difficult for investors to rely on capital appreciation alone to meet return targets."

This is a global phenomenon.

In the US, for example, Apple started paying a dividend to investors for the first time in 17 years this year: "Apple's goal is clear. It wants to slightly reduce its total cash and securities holdings of nearly €100 billion. CEO Tim Cook explained frankly this paradigm shift unthinkable under Steve Jobs, saying that the company does not know where to put its money. CFO Peter Oppenheimer added that over the next three years, Apple wants to spend $45 billion on dividends, share buybacks and employee stock options."

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