Income Investing: The February Effect: Dividend Hikes Spike In the Shortest Month -- Barron's

Dow Jones2022-08-20
By Lawrence C. Strauss 

It seems as though dividend increase announcements by large U.S. companies occur every week, one after another, even in the dog days of August.

Recent companies in that bucket include Martin Marietta Materials (ticker: MLM), which declared an 8% hike on Aug. 10; International Flavors & Fragrances $(IFF)$, which set a 2.5% increase a few days earlier; and Illinois Tool Works $(ITW)$, which declared a 7.4% increase in early August.

Such announcements, however, aren't distributed evenly over the calendar year -- far from it. In fact, based on data from S&P Dow Jones Indices going back to 2014, August has been relatively light for dividend hikes among S&P 500 index companies.

The most popular month for S&P 500 members to announce dividend boosts is February, when 70 companies on average have made such announcements.

"Most of the companies are on a December fiscal" year, says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. "They've done their numbers and checked everything out."

What's more, the February dividend increase announcements precede the annual shareholder meetings that many companies hold, he adds. "There's no better point in time to increase your dividend payment than before you have to meet the owners," Silverblatt says.

The first quarter is by far the busiest three-month period for these announcements at 123 on average, followed by the fourth quarter at 88. The second and third quarters are a little lighter at 71 and 67, respectively.

Silverblatt says that most companies typically follow a pattern of when they announce dividend raises.

Among the companies that have declared dividend increases in February recently, for example, are the conglomerate 3M $(MMM)$, retailer Walmart $(WMT)$, and NextEra Energy $(NEE)$, a large utility and alternative-energy company based in Florida. All three companies are members of the S&P 500 Dividend Aristocrats Index, whose members have paid out a higher dividend for at least 25 straight years.

The second most popular month for such declarations is January, with 35.

As the accompanying table shows, there is some seasonality to these announcements by S&P 500 companies. After cresting in the first quarter, things slow down a bit, with an average of 32 announced dividend increases for S&P 500 companies in April, 26 in May, and 13 in June -- the slowest month of all.

Things perk up in July, when the declarations total an average of 33, but announced third-quarter dividend hikes dip to 20 in August and 14 in September. The fourth quarter sees a rebound, though not to February levels -- 25 on average in October, 32 in November, and 31 in December.

Regardless of the month, dividend increases have been strong this year. Silverblatt expects S&P 500 dividend payouts to hit nearly $564 billion this year, up about 10% from about $511 billion in 2021. That would be the biggest year-over-year increase since 2014, he adds.

Don't Expect the Buyback Tax To Be a Boon for Dividends

The Inflation Reduction Act, which President Joe Biden signed into law this past Tuesday, includes a 1% tax on stock buybacks starting on Jan. 1, 2023. It could make dividends more attractive than buybacks, at least at the margin, as companies weigh how to return capital to shareholders.

A recent report by Goldman Sachs Portfolio Strategy Research, however, expects the buyback excise tax "to have a limited impact on S&P 500 use of cash." But one consequence could be companies pulling forward planned buybacks to this year from 2023, according to the report, "especially with most share prices still substantially below their previous highs."

Still, "the outlook for S&P dividends appears strong, with or without any impact from the buyback tax," the report adds. "Cash not spent on buybacks will be spent elsewhere," more likely on dividends and/or mergers and acquisitions than on capital spending.

Several companies have said they would take a wait-and-see approach about the buyback tax. Gaurav Kapoor, chief financial officer of Aecom $(ACM)$ said during the company's latest earnings call earlier this month that it remains "committed in investing in what provides the best shareholder value creation opportunity."

The company, with a market capitalization of about $11 billion and whose offerings include architectural and engineering design services, has been paying a quarterly dividend of 15 cents a share. The company said in a release earlier this month that it had repurchased more than 15% of its shares over the past two years.

High Dividend Yielders Beat High Dividend Growers, for Now

Two mutual funds managed by the same advisor illustrate how stocks with higher dividend yields continue to outperform those with faster dividend growth this year.

As of Aug. 16, the $21 billion T. Rowe Price Dividend Growth fund (PRDGX) had returned about minus 6% this year. That trails the 0.6% return of the $18.5 billion T. Rowe Price Equity Income fund (PRFDX).

In a recent research note, Cirrus Research observes that baskets of dividend yield stocks "reflect sizable exposures" to financials, real estate, and energy, while growth strategies have "notable overweights" in technology and industrial sectors.

As of July 31, the equity income fund's largest weighting was financials at 20%, followed by healthcare (17%), industrials and business services (10.4%), and utilities (10%). Energy, a strong performer this year, was at 7.6%.

For the dividend growth fund, however, its recent energy weighting was at about 2%, while information technology was the largest at a little more than 20%. Technology stocks in the S&P 500 have lost about 14% this year, one of the weaker performers.

Year-to-date performance numbers aren't long-term measures. But the performance contrast this year between these two funds does show that the market's overall preference for growth or value can have a big impact on performance -- dividend payouts notwithstanding.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com

 

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$(END)$ Dow Jones Newswires

August 19, 2022 21:30 ET (01:30 GMT)

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