Waiting for the Mailman

STATE OF BUSINESS

It has been a good year for widows and orphans -- and the other millions of Americans who regularly look in their mails for that tangible token of people's capitalism: the dividend check. With corporate profits running at record highs, the U.S.'s 17 million stockholders have watched expectantly to see what firms would share their prosperity by increasing dividends. Last week's cliffhanger was giant A.T. & T., which kept 2,200,000 shareholders agonizing while its 18 directors debated behind closed doors whether to raise the 900 quarterly dividend of the world's largest utility. A.T. & T.'s directors decided against a raise now -- but enough other U.S. companies have declared increases to make this a record year.

In the year's first half, intricate electronic systems and toiling clerks dispatched to the big and little shareowners of U.S. companies $7.5 billion in payments, 5.4% more than last year. According to Standard & Poor's statisticians, 740 U.S. corporations had raised their dividends by the end of July, 141 more than in 1962. Much as this flurry of generosity pleased shareholders, it raised among businessmen and econo mists an oft-debated question: How much of its earnings should industry share with its stockholders?

Rearguard Action. On the average, U.S. corporations pass out nearly two-thirds of their profits to shareholders. To many businessmen, this seems too much; they contend that firms often give out money that really should be used to expand and improve operations."There are some companies paying out dividends that would actually be showing no profit at all if they were making the proper set-aside for depreciation of their facilities," says Charles B. ("Tex") Thornton, chairman of California's fast-rising Litton Industries. Litton has never in its ten-year history declared a cash dividend, preferring--as many other companies do--to hand out additional shares of stock to its shareholders and to use the retained earnings for expansion and modernization.

Growth-conscious Wall Street also puts dividend payments second in importance to earnings in appraising a company, but this idea is harder to sell to stockholders--particularly the smaller investor who tends to put his money into blue chips. Many corporate managers are still convinced that their little stockholders want and deserve those regular checks. "Shareholders are businessmen too," says President William G. Stewart of Universal-Cyclops Steel Corp., "and they're entitled to a reasonable return on investment--or there won't be any investment." Just about everyone agrees that companies should be sure that they can sustain a dividend increase--or should not declare one at all. Shareholders usually take a dim view of managements that later cut dividends.

Some firms regard their reputation for providing a sustained yield as so valuable that they dig deep into their reserves when earnings are too low to cover the outlay. This is all right, says Harvard Business School Economist John Lintner, "when the earnings decline is pretty surely temporary. Management will be very often serving stockholders best by maintaining dividend payments and protecting the price of the stock." But some industries have persisted too long in this rearguard action--and steel is one of them. While earnings dropped year after year and the industry lagged in modernization, steelmen kept rewarding stockholders at the same level in order to present an outward picture of stability. Result: dividends amounted to 50.1% of profits in 1957 but accounted for 79.8% of profits in 1961, when ten steel companies finally slashed their payments.

A Long View. Economists use a company's outlook for growth as the most sensible--though a far from infallible--standard of when dividends should be paid. A fairly young, growing company usually needs more cash to finance expansion and lay a firm financial base, and its earnings, if any, should really be kept for that purpose. A mature company, whose finances are healthy and whose growth is steady and predictable, ordinarily does not need so much ready cash and can pay out a sizeable portion of earnings.

The men who sit down in boardrooms to decide whether to distribute their companies' profits argue that they must take a long view of the stockholder's welfare. If they determine that the stockholder could use the money to more advantage than the company could --a determination based on tax rates, current interest rates and cash flow--the checks go out. But many companies believe, with Rockwell Manufacturing Co. Chairman Willard F. Rockwell, that "we're doing our stockholders a favor by not giving them too much." Money put instead to needed expansion or modernization may not only save a company the 5% or 6% in interest charges that it would otherwise have to pay to borrow the money, but often results in increased earnings and a higher worth for the company's stock.

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