More Firms Boost Dividends, But Are They Holding Back?

Call it the corporate Valentine. February is traditionally the most popular month for dividend increases. And blue chips are showing shareholders the love in a way they haven't since before the great recession, with dividend boosts up 35 percent, according to Standard and Poor's.

Stock certificates
Stock certificates

Yet, given the record levels of cash corporations are holding on the books, are they being generous enough?

Dow component Coca Cola was the thirtieth blue chip firm to boost its dividend since the start of the year, raising its annual payment to shareholders by 7 percent from $1.76 to $1.88 a share. Coke shares rose nearly 2 percent on the news. Yet, the beverage giant's dividend boost puts it on the low end of recent increases.

Standard and Poor's Howard Silverblatt says the median dividend increase year to date for S&P 500 firms is 12.2 percent. That puts the blue chips on track to pay out $222 billion in annual dividends in 2011, up about 20 percent from last year but still well below 2008 levels.

"It's positive, but a slow recovery," when compared to pre-recession dividend payouts says S&P's Howard Silverblatt of S&P.

It seems especially slow when you consider that the S&P 500 is on track to to regain its 2008 highs, and corporate earnings in 2011 are expected to reach all-time record levels. And when you consider that massive corporate cash hoard.

Silverblatt says S&P 500 firms, excluding financials, were sitting on a record $903 billion in cash at the end of the third quarter of 2010, and a his preliminary estimates show that cash grew another 3.6 percent in the fourth quarter.

"That's 68 weeks of net income sitting on the books," he concludes. "It's more than enough to pay for buybacks and dividend increases — but they're choosing not to."

While some firms may be choosing to hoard cash, many of the major financial firms which traditionally paid the biggest dividends in the S &P remain constrained from making payouts by regulators.

"Bank dividend yields are at their lowest absolute and relative levels going back to 1961," KBW chief equity strategist Fred Cannon wrote in a note to clients earlier this year. "In our view, the lack of yield in financial stocks generally, and large banks particularly, has been a negative factor for the industry."

That's also one big reason why S&P 500 dividends haven't recovered their pre-recession levels.

Financials were largest dividend-paying sector in the S&P in 2001, accounting for 30 percent of payouts. This year, financial firms are expected to account for just 9.25 percent of dividend payouts, providing about the same contribution as traditionally low dividend participation technology firms.

Major banks subjected to stress testing following the 2008 financial crisis which meet reserve requirements must apply to the Federal Reserve for permission to deploy capital for dividends and share repurchases. The Fed has said it will begin reviewing those applications during the first quarter of this year.

JPMorgan CEO Jamie Dimon said he expects the Fed to give banks the go ahead to boost dividends next month, speaking to shareholders at the company's annual meeting earlier this week. Dimon says he anticipates his bank paying 35% of net income in dividends, once it gets permission from the Fed.

Many financial sector investors pining for dividends may have to bide their time for a while longer.

"After having managed through a period of declining capital levels during the recession," KBW's Fred Cannon wrote in the firm's 2001 Financial Services Outlook, "We believe the majority of financial stocks will use share repurchases as the primary method for capital deployment initially."

Standard and Poor's Howard Silverblatt estimates, with many financials sidelined, S&P 500 dividends won't return to 2008 levels of $247 billion until 2013.