Post by unlawflcombatnt on Dec 31, 2007 3:08:07 GMT -6
from the Wall Street Journal:
Dividends, Buybacks Feel the Squeeze
By SCOTT PATTERSON
December 30, 2007
"In the past few years, U.S. companies have been passing out a lot of cash in the form of share repurchases and dividends. And financial companies have been among the most generous.
But those financial firms are likely to be stingier in 2008, even as the overall picture for buybacks and dividends remains bright. Blame the squeeze on earnings from this year's troubles in the housing and debt markets.
Share buybacks in particular have surged in recent years, as the economy and corporate earnings have grown at a solid clip. Companies in the Standard & Poor's 500-stock index repurchased nearly $450 billion in stock through the first three quarters of this year, according to S&P -- up from $430 billion for all of 2006 and $350 billion for 2005.
Dividends have also grown, but not as robustly: Estimated 2007 dividends of $247 billion are up from $225 billion in 2006 and $203 billion in 2005.
Goodbye, Growth
This year's housing-market meltdown helped bring the earnings-growth boom to a screeching halt. In the third quarter, earnings by companies in the S&P 500 fell 4.5% from a year ago, according to Thomson Financial. Earnings by financial companies plunged a whopping 27%.
For the fourth quarter, S&P 500 earnings are expected to be down 8.7%, with financial-industry earnings down 64%.
A big reason for the declines: huge write-downs of subprime mortgage securities at financial giants such as Citigroup, Merrill Lynch, Morgan Stanley and Bear Stearns....
The financial-industry woes threaten to choke off some of the growth in buybacks and could also rein in dividends. Financial companies repurchased $280 billion of stock in the three years through September, second only to technology companies.
Less buyback activity could mean trouble for investors. Buybacks shrank the overall supply of shares in the past few years, helping to squeeze the market higher like a tube of toothpaste. They offset the impact of vesting stock options, which increase the number of shares outstanding.
Buybacks can also spruce up a company's financial statements: The fewer shares a company has outstanding, the better its per-share earnings.
Still, fewer buybacks wouldn't be an entirely negative development. Skeptics say buybacks can create the illusion of strong earnings growth: "Companies can make the per-share earnings go up, but net income doesn't increase at the same time," says Charles Rotblut, senior market analyst at Zacks Investment Research.
Some companies would be better off using their extra cash to build up their own businesses, critics say. The problem now, though, is that companies may start reducing buybacks not to spend their spare cash elsewhere, but because they have less to spend....
Dividends could also come under the knife at more companies...Washington Mutual, which had increased its dividend every quarter for more than a decade, recently slashed its payout to 60 cents a year from $2.24. Fannie Mae and Freddie Mac, two large government-sponsored mortgage investors, also cut their dividends.
Financial companies account for 30% of all dividends in the S&P 500. Bank of America and Citigroup, which distribute $11.4 billion and $10.8 billion in dividends a year, respectively, are 2 of the top 3 dividend issuers in the index. The biggest issuer is General Electric, which has a large financial arm....
Some companies may simply decide to forgo dividend increases. "The financials have the greatest tendency to pay dividends and to increase them year after year," says S&P strategist Howard Silverblatt. "If they don't increase [their dividends], investors will feel it."...."
Dividends, Buybacks Feel the Squeeze
By SCOTT PATTERSON
December 30, 2007
"In the past few years, U.S. companies have been passing out a lot of cash in the form of share repurchases and dividends. And financial companies have been among the most generous.
But those financial firms are likely to be stingier in 2008, even as the overall picture for buybacks and dividends remains bright. Blame the squeeze on earnings from this year's troubles in the housing and debt markets.
Share buybacks in particular have surged in recent years, as the economy and corporate earnings have grown at a solid clip. Companies in the Standard & Poor's 500-stock index repurchased nearly $450 billion in stock through the first three quarters of this year, according to S&P -- up from $430 billion for all of 2006 and $350 billion for 2005.
Dividends have also grown, but not as robustly: Estimated 2007 dividends of $247 billion are up from $225 billion in 2006 and $203 billion in 2005.
Goodbye, Growth
This year's housing-market meltdown helped bring the earnings-growth boom to a screeching halt. In the third quarter, earnings by companies in the S&P 500 fell 4.5% from a year ago, according to Thomson Financial. Earnings by financial companies plunged a whopping 27%.
For the fourth quarter, S&P 500 earnings are expected to be down 8.7%, with financial-industry earnings down 64%.
A big reason for the declines: huge write-downs of subprime mortgage securities at financial giants such as Citigroup, Merrill Lynch, Morgan Stanley and Bear Stearns....
The financial-industry woes threaten to choke off some of the growth in buybacks and could also rein in dividends. Financial companies repurchased $280 billion of stock in the three years through September, second only to technology companies.
Less buyback activity could mean trouble for investors. Buybacks shrank the overall supply of shares in the past few years, helping to squeeze the market higher like a tube of toothpaste. They offset the impact of vesting stock options, which increase the number of shares outstanding.
Buybacks can also spruce up a company's financial statements: The fewer shares a company has outstanding, the better its per-share earnings.
Still, fewer buybacks wouldn't be an entirely negative development. Skeptics say buybacks can create the illusion of strong earnings growth: "Companies can make the per-share earnings go up, but net income doesn't increase at the same time," says Charles Rotblut, senior market analyst at Zacks Investment Research.
Some companies would be better off using their extra cash to build up their own businesses, critics say. The problem now, though, is that companies may start reducing buybacks not to spend their spare cash elsewhere, but because they have less to spend....
Dividends could also come under the knife at more companies...Washington Mutual, which had increased its dividend every quarter for more than a decade, recently slashed its payout to 60 cents a year from $2.24. Fannie Mae and Freddie Mac, two large government-sponsored mortgage investors, also cut their dividends.
Financial companies account for 30% of all dividends in the S&P 500. Bank of America and Citigroup, which distribute $11.4 billion and $10.8 billion in dividends a year, respectively, are 2 of the top 3 dividend issuers in the index. The biggest issuer is General Electric, which has a large financial arm....
Some companies may simply decide to forgo dividend increases. "The financials have the greatest tendency to pay dividends and to increase them year after year," says S&P strategist Howard Silverblatt. "If they don't increase [their dividends], investors will feel it."...."