The “return of the dividend” in 2003
During
this year’s Community Bank Economic and Market Forecasts
my company hosts, scheduled this year for February 5th in
Hattiesburg, February 10th in Jackson, and February 11th
in Meridian, I will definitely touch on the “return
of the dividend.”
My view has been that the dividend yield should always be
at the center of fundamental stock analysis. It is also
my “two-cents worth” opinion that a lot of the
problems and a lot of the evil we have faced the last three
years were due to disregarding the place of dividends in
the total return of stocks. All the emphasis was on capital
gains and earnings growth, but earnings are not a simple
mathematical concept. They are what some accountant says
they are. Add to this the widespread use of stock options
as compensation and the door was wide open to smoke and
mirrors abuses and fraud.
It remains my opinion that dividend yields are still way
too low for a secular bottom. Yet, I have little doubt that
if Congress passes the Bush tax bill on dividends, many
companies will be under tremendous pressure to institute
or increase dividends. Dividends are cold, hard cash, and
you need real and actual earnings to pay dividends. Moreover,
the dividend tax relief, while increasing the budget deficit,
may not be all that burdensome if it increases capital gains
taxes. It may not be over-stimulation if it stimulates more
investment rather than consumption. Furthermore, and very
importantly, it may encourage companies to raise equity
money rather than getting deeper into debt, which could
improve the very high-risk corporate balance sheets. Finally,
the chart above shows that stocks are already undervalued
on the basis of current dividend yields versus T-bill yields.
That is before any tax relief on dividends. There is some
$2.3 trillion in money market mutual funds where the interest
is getting taxed and the yield, after fees, is around T-bill
yields. If earnings begin to improve and investors gain
some confidence about stocks, we could have a substantial
rally.
In conclusion, my “two-cents worth” opinion
is that the Bush tax cut on dividends has substantial bullish
potential. Nevertheless, in the long run, both T-bills and
stock dividend yields could be “overvalued”,
so stocks will need to stand on their own, and dividend
yields are still too low for a secular bull market. Therefore,
I see this as a short-term rather than long-term “fix.”
DBJ
(Stacey Wall is President/CEO of Pinnacle Trust, the
state’s only independent trust company, in Jackson.)
