Dividends Down on Declining Profits

January 2, 2002 (PLANSPONSOR.com) - In 2001 dividend payments on the S&P 500 index fell by 3.3% - the largest decline since a 4.1% drop in 1951, according to Standard and Poor's (S&P).

The fall in 2001 and the 2.5% decrease the previous year are the first consecutive dividend declines since the early 1970s. However, S&P is expecting the number to turn positive in 2002 – albeit by a modest 1% to 2%.

In a larger sample of 7,500 listed companies, in 2001 there were only 1,326 dividend increases registered, down from 1,496 hikes in 2000. Meanwhile, dividend decreases jumped to 127 in 2001, well above the prior year’s 77.

Dividend omissions in 2001 climbed to 78 from 60 in 2000.

Falling Profits

While the decline in profits was the main cause of the weak dividend payouts, many companies moved toward a low-dividend-payout policy during the decade-long bull market, and are reluctant to reverse this course, according to S&P.

The low-dividend policies are designed to reward shareholders through stock buybacks and other appreciation-generating and more tax-efficient dividend substitutes. They also provide the companies with greater financial flexibility, according to the rating agency.

Payers Fare Better

S&P also reports that dividend-paying stocks outperformed non-dividend-payers in 2000 and 2001.

Last year, the dividend payers in the S&P 500 fell an average of just 0.1%, while the stocks of S&P 500 companies that don’t pay dividends fell by an average of 5.4%.