A Shower of Dividends for Investors

Although stock prices remain stuck a bit below 1,000 on the Dow Jones industrial average, most Wall Streeters still think it is only a matter of time before the barrier crumbles and the U.S. economy continues its comeback. In back-and-forth trading last week the Dow average closed at 972.92, about even with the previous week's close. Simultaneously, however, the nation got some of the best news yet about prices and jobs. The wholesale price index in February dropped .5%; it was the fourth straight month in which that key indicator has either held steady or gone down. Even better, the unemployment rate fell to 7.6% in February, from 7.8% in January and 8.3% in December.

Corporate chairmen and presidents are behaving as if they expect both profits and stock prices to keep going up. U.S. companies will probably schedule $13 billion worth of new stock issues for sale in 1976--already well ahead of the $9.2 billion actually marketed in all of last year. Stock splits are also on the rise; they have been announced by such companies as Bendix, Crane, Amsted, and U.S. Steel. Most important, corporate directors are encouraging investors by announcing the largest number of dividend increases in 20 years.

During January and February, 454 dividend increases were announced, v. 226 in the same months a year earlier. Among them: R.H. Macy, Federated Department Stores, Bank of America, Carnation, American Brands, General Foods and Owens-Illinois. The most notable boost was by American Telephone and Telegraph, which has more stockholders (2,923,000) than any other U.S. company. AT&T surprised Wall Street last month by raising its quarterly dividend on each share a dime to 950, double the increase that analysts had expected. A T & T's profits actually declined slightly from 1974 to 1975, but Chairman John D. deButts explained that the increased dividend "reflects the directors' confidence in the economy's continuing recovery and in our own business prospects."

Outpacing Inflation. The increases point up a major, though often unnoticed, attraction of stock purchases: dividends throughout the '70s have been rising rapidly enough to keep most stockholders' income from their share holdings ahead of inflation. Although stock prices themselves dipped sharply during that period, dividends paid by U.S. corporations soared from $22.9 billion in 1970 to $32.8 billion last year; that 43% rise outpaced a 36% climb in the consumer price index. This year Economist Irwin Kellner of New York's Manufacturers Hanover Trust expects dividends to go up about 8%, well ahead of the anticipated 6% rate of inflation.

Behind the current surge in dividends is a desire by many companies to make their stocks more attractive, thus allowing them to raise money by issuing new stock instead of by bonds or other debt securities. Debt financing swelled considerably during the past five years as stock prices fell to levels so low as to make new issues virtually impossible to market. Many stocks are still selling far below their record high prices, and a dividend sweetener is seen by many corporate finance officers as a way to increase demand.

The growing interest of investors in dividends contrasts sharply with the atmosphere of the bull market of the '60s. Professional money managers then concentrated on price appreciation and ignored dividend yields. The star performers of those days--Xerox, Polaroid and other so-called glamor issues--paid little in dividends, yet held out the promise of higher profits and prices in the future. Now the high flyers' wings have been clipped and such laws as the Pension Reform Act of 1974 mandate a new prudence among managers who invest other people's money. Dozens of "index fund" managers now buy high-dividend stocks and merely try to match or slightly exceed increases in such popular price indexes as Dow Jones and Standard & Poor's.

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Last week Canada Southern Railway Co., a Penn Central subsidiary, declared a $60 dividend--larger even than the $41 price of the stock itself--apparently to keep a $9 million cash reserve fund out of the hands of Conrail, the Government corporation that takes over the Penn Central and six other bankrupt railroads on April 1. A company spokesman said the timing of the dividend was coincidental but implied that Conrail was entitled only to the railroad's physical assets and not the cash reserve fund. The payout faces a certain court challenge; Conrail had made it clear that it would block any attempt to transfer assets from the bankrupt railroads to private shareholders.

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