Ignore Our Pricey Stocks – Look At Our Div Hikes

The great dividend seduction is now officially in overdrive. Boeing (BA) just announced a 50% increase in its dividend. 3M (MMM) set a 35% boost in its payout. Archer Daniels Midland (ADM) approved a 26% dividend increase. CVS Caremark (CVS) set its dividend hike at 22%. General Electric (GE) chimed in with a near 16% dividend hike. AT&T (T), clinging desperately to its Dividend Aristocrat bona fides (At least 25 consecutive years of rising payouts) is the only weakling to announce lately, with a piddly 2% increase.

All of those dividend increases come on the heels of the $339 billion FactSet reports S&P 500 companies doled out in the 12 months through September. A year ago the trailing 12 month dividend haul was $277 billion. According to FactSet the current sum of dividends paid by S&P 500 companies is 40% above the 10-year average.

And there’s plenty of room for more dividend growth. The average dividend payout ratio is just 31%, compared to a long-term norm of around 50%. Moreover, even if earnings (the denominator in calculating payout ratios) were to slow, there’s also the fact that many companies are sitting on oodles of cash that can cover years worth of dividend payouts.

BA Dividend Yield (TTM) Chart

BA Dividend Yield (TTM) data by YCharts

Of the big six that recently grabbed dividend headlines, four of them -- CVS Caremark, Boeing, ADM, and 3M -- essentially boosted their current dividend yield from below the 2% average for the S&P 500 to slightly above. That will sure help get you noticed in Street dividend screens. Boeing management has said getting its yield higher (it was 1.6% prior to the announcement) was part of the reason for the mega jump in the payout.

General Electric is the only one with a competitive yield and a decent dividend growth story. But once you factor in the just-announced dividend hike, GE’s payout ratio, based on forward earnings expectations, is right around 50%, which is what GE has said is its general target. If earnings keep growing at a nice high single digit pace, so too will dividends. But it doesn’t seem like there is going to be a repeat of the doubling of the dividend since 2010 that came after the jolting dividend cut during the financial crisis.

Boeing stock traded up on the news of its dividend boost, and a fresh $10 billion repurchase plan. The thing is, in the five years prior to this big increase, Boeing’s dividend policy had been solid, if not spectacular:

BA Dividend Chart

BA Dividend data by YCharts

And then there’s the issue of valuation, using forward PE ratio:

BA PE Ratio (Forward) Chart

BA PE Ratio (Forward) data by YCharts

That’s some mighty multiple expansion. There is no question Boeing is firing on all cylinders of late. Free cash flow is up 55% over the past 12 months, but it’s worth noting that true to its cyclical nature, that represents more than half the growth for the entire trailing five-year stretch.

Dividend growth seems to be the move du jour for corporations to tug at investor pocket strings. But just because there’s a big increase in a dividend doesn’t mean there’s an equally big argument for piling in right now.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



Please note that this feature is only available as an add-on to YCharts subscriptions.

Please note that this feature requires full activation of your account and is not permitted during the free trial period.

Start My Free Trial {{root.upsell.info.call_to_action}} No credit card required.

Already a subscriber? Sign in.