Consumer firms secure enough to pay out cash

By Brad Dorfman – Analysis

CHICAGO (BestGrowthStock) – Companies that rely on consumer spending sent a message to investors with a recent spate of double-digit dividend increases: “We have a lot of cash and we cannot think of a better place to spend it.”

Packaged goods companies like Procter & Gamble Co (PG.N: ) and tobacco companies like Altria Group Inc (MO.N: ) are known for consistently paying out a good portion of the cash they raise as dividends. It is one key reason investors buy the stocks in the first place.

But in the past several weeks, some companies have given shareholders even bigger rewards for sticking with them — like Dr Pepper Snapple Group Inc (DPS.N: ), with a 67 percent dividend increase and Clorox Co (CLX.N: ), with a 10 percent increase.

Retailers have joined the cash giveaway this year, with high-end jeweler Tiffany & Co (TIF.N: ) raising its dividend 25 percent on Thursday, following an 18 percent dividend increase earlier this year.

Upscale department store Nordstrom Inc (JWN.N: ) increased its payout by 25 percent this week, while Gap Inc (GPS.N: ) and Home Depot Inc (HD.N: ) also notably raised their dividends this year. Starbucks Corp (SBUX.O: ) announced its first-ever dividend in March.

The big payouts are all the more notable given recent industry pessimism, as more consumer sector executives say the U.S. economy’s growth is not picking up as fast as hoped and as a European debt crisis weighs on financial markets.

What makes the strategy possible is that companies have built up cash, are having an easier time making acquisitions when they want to and view the payouts as a simpler commitment than expanding operations in an uncertain economy.

“They generally generated higher than expected cash flow last year because they had an extreme focus” on cash flow, said Janice Hofferber, senior credit officer at Moody’s Investors Service, who follows packaged goods and tobacco companies.


When credit markets seized up in 2008, consumer companies were among those that curtailed share repurchases and expansion and cut costs to conserve cash.

Now that consumers are showing some signs of spending, though still cautiously. companies are more willing to let some of that cash go — and in many cases, they are doing so in the form of higher dividends.

Of the 123 dividend increases so far this year, more than a third have been in consumer staples or discretionary companies, said Howard Silverblatt, analyst at Standard & Poor’s.

“Consumers are spending a little bit more — though not a lot, and margins aren’t great, but they are improving — and so the companies feel comfortable in doing this,” he said.

The fact that Tiffany raised its dividend again this week — when a falling euro could have been a bad omen for its international business — was an important signal.

“They did it yesterday, amidst the turmoil in the market, so they had to look really close at the euro, and they still increased it 25 percent,” Silverblatt said.

Raising the dividend is a more permanent sign of confidence since a dividend has to be paid once announced, unlike a share buyback authorization, which gives a company more discretion on when, and how much, to spend.

But these companies are also able to pay their higher dividends because tight credit markets and economic uncertainty have helped them save money in another area where they spend cash: the acquisition market.

The drop in private equity spending on acquisitions has helped bring prices down for companies looking for smaller enhancements to their current operations.

“Companies can make bolt-on acquisitions and not have to overpay,” Moody’s Hofferber said.

At the same time, companies may be too uncertain about future growth in the economy and about the costs of new government regulations, like the recently enacted healthcare policy, to rapidly add plants and employees.

“That uncertainty makes it more difficult for companies to plan for the future,” said Lawrence Creatura, a portfolio manager at Federated Investors, which manages $350 billion in assets.

“However, cash is still building up on their balance sheets and they need to do something with it.”

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(Additional reporting by Nivedita Bhattacharjee in Bangalore and Jessica Wohl in Chicago; Editing by Michele Gershberg and Gerald E. McCormick)

Consumer firms secure enough to pay out cash