Dividends: Slightly Deeper in Recessionary Territory

Political  Calculations
Posted: Jul 06, 2014 12:01 AM

The number of U.S. companies acting to cut their dividends during June 2014 increased to 16 in June 2014, as the U.S. economy would appear to still be experiencing recessionary conditions. While that's down from the average of 30 companies per month that took that action during the first quarter of 2014, when the U.S. economy recorded an annualized real economic growth rate of -2.9%, it is higher than the 13 and 12 companies per month that cut their dividends respectively in April and May 2014.

Number of Public U.S. Companies Posting Decreasing Dividends, January 2004 through June 2014

Still, by comparison to the first quarter of 2014, 2014-Q2 was an improvement, somewhat reversing the economic momentum of the first quarter, although that momentum gained in April and May would appear to be losing a bit of steam in June. We think the reversal in momentum from the first quarter of 2014 might mean a solid annualized growth rate being recorded for GDP in 2014-Q2.

We're also noting a curious pattern with companies paying extra, or special dividends compared to previous years. The chart below shows what we're seeing.

Number of Public U.S. Companies Paying Extra Dividends by Month, 2004-2014

Given what we observe for each of the months in the years from 2004 through 2013, there is an especially large number of companies making special dividend payments in each month in 2014. Typically, companies pay out extra dividends when they have unusually strong earnings.

That was definitely not the case however with the first quarter of 2014.

And unlike in the fourth quarter of 2012, which set the record for the greatest number of extra dividends paid as part of the Great Dividend Raid, there wouldn't seem to be an obvious tax avoidance strategy at work during the first six months of 2014.

But there's one other reason why companies pay special dividends - it's something they do when they have "extra" cash on the books, but find that it's not worth their time or effort to reinvest it back into their business.

Meanwhile, there are some indications that U.S. companies are financially restructuring themselves to rely more upon debt-based financing than equity-based financing, which is something that they might do if they intend to engage in a "growth-by-acquisition" business strategy. In this case, such companies would seek to shed excess cash on their books to avoid becoming someone else's takeover target at the same time they're building up their debt-based financing as they're on the prowl for companies that have greater organic growth potential than they do themselves.

If that doesn't sound particularly productive, it isn't. None of these things speak well for the state of potential economic growth outside of the very near term for the U.S.