I don’t have a crystal ball or a bunch of models or mathematical proofs to make my point, but I have a sense, based mostly on the tenor of the times, that we’re likely to see fewer dividend stalwarts in the future.
The Makings of Dividend Payers
Let’s consider the qualities that characterize solid dividend payers currently. As a rule, they are large, well-established and profitable companies that continue to grow, but rarely at the pace of newer, “hot” companies. Their corporate cultures are strong and well established, and their leaders tend to view the companies’ dividend-paying record with great pride. While they may be just as obsessed with quarterly performance as their peers, dividend CEOs, if we can use that term, seem to have a longer-term view of things, at least insofar as their company’s position in the firmament of corporate America.
With the slowdown of manufacturing as the driver of our economy and the rise of high-tech, the cultural norms of American business have changed. Solid, mature and kind of boring is out, while cool, ultra-smart and fast is in.
MSFT vs. GOOG
Take Microsoft (MSFT ), a company whose growth and maturity followed a traditional trajectory despite the high-tech nature of its business, but is now often criticized for being stodgy and not sufficiently innovative. It yields about 3.2%.
Google (GOOG), by contrast, is also enormously profitable and sits on billions in cash, but pays no dividend. With the self-driving cars it is developing or its eyeglasses-cum-computer, there are many sound reasons for the company to reinvest its enormous profits rather than distribute them to shareowners in the form of dividends.
But I think the reason for being anti-dividend, or relatively indifferent to dividends, goes deeper. It goes to the thinking of and outlook of high-tech CEOs, who think of themselves not so much as captains of industry, but as boy geniuses whose responsibility it is to transform society. It’s all part of the t-shirts, the studied casualness and the coolly snooty West Coast “we know better” vibe, which is taking its place with the “we know better” tones of smug Midwestern industrial barons and the haughty East Coast establishment.
Other Forces
If the vision for a company is one of transformational agent rather than respected corporate giant, dividends are likely to come down a few notches in CEO priority. Also mitigating against the morphing of growing companies into dividend giants is the rise of private equity. Corporations with lots of cash and reliable, albeit not spectacular, growth are likely to become increasingly rare over the coming years as corporate activists and other big investors scoop up such companies, load them with debt, and take the profits and dividends for themselves.
Another threat: Since dividend income, by definition, is received by those who directly own stocks — a small segment of the population that is easy to characterize as “fat cats” — look for the government to tinker with tax rates that apply to dividend income as it searches for revenue. If taxes on dividend income are raised, corporations will be more inclined to retain earnings and possibly buy back more stock to raise share prices, rather than pay out dividends on which shareholders would have to pay more tax.
The Bottom Line
I hope my reading of the tea leaves is wrong and that our new high-tech business leaders see the beauty in dividends as they grow older. In the meantime, seek out quality dividends while you can still get them.
Image courtesy of fantasista at FreeDigitalPhotos.net
