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Here’s a great example of one of my pet peeves about the financial media. No matter how good the news is, we can always find a negative angle. The writer's goal is what paragraph do we drop the crucial "but" line in.

Here’s how you start: Great news! Corporations are making record profits.

This year, the companies in the Standard & Poor's 500-stock index are on track to pay out more than $500 billion to shareholders in the form of dividends and share repurchases, or buybacks, according to S&P. That's up more than 30% from last year's record -- and equivalent to nearly $1,700 for every person in the U.S.

"This is an enormous amount of money being paid, to some degree, in unison," says Howard Silverblatt, an equity-market analyst at S&P in New York.

The outpouring of cash from corporate coffers in the U.S. is just one aspect of a world-wide phenomenon. With interest rates low, unprecedented amounts of capital are sloshing around the globe, in search of better returns. Pension funds, mutual funds and insurance-company accounts, for example, have some $46 trillion in assets, up almost a third from five years ago.

The flood of dividends and share buybacks is a direct result of record U.S. corporate profits and is welcome news for shareholders, particularly because dividends are taxed at lower rates and share prices have been flat; since the beginning of the year, the Dow Jones Industrial Average has risen a paltry 1.4%.

Just this month, 23 companies in the S&P 500 have boosted their dividends, including General Electric Co. and toy maker Mattel Inc., which also expanded their share-repurchase plans. For the year as a whole, 275 companies in the S&P 500 have raised their dividends; only eight have cut them.

Sounds good. In every episode of “Behind the Music,” you always get the line that goes something like: “Just when it seemed like nothing could go wrong for Styx, everything went wrong.”

But there could be an economic downside to the cash glut.

Uh oh.

The fact that companies have been sitting on so much cash is, in some respects, a vote of no-confidence in U.S. economic prospects: At least some companies may be signaling they can't find enough profitable ways to reinvest their earnings, so they are simply returning it to shareholders.

Attack of the indefinite pronouns! In some respects, some journalists may use a few of them as a vote of no-confidence in a threadbare theme. By the way, what might some investors being doing with some of their dividends? Burn them or invest in the economy? It doesn’t say so we’ll simply never know.

Through dividends, a company, in effect, distributes part of its profits directly to shareholders. Share buybacks, in which a company buys some of its own shares outstanding, can benefit shareholders in other ways: They can boost the company's share price, and they can also be a smart corporate investment if the company correctly judges that its stock is undervalued.

Or it can be a complete waste of money. Just ask shareholders of Cisco.

Some economists call the payouts this year an ominous development that may be stealing from future economic growth, since they suggest companies are having trouble spotting new products, projects or services they think will boost their growth. "These payments keep the economy growing more slowly because that money isn't flowing into capital spending," says Milton Ezrati, chief economist at Lord Abbett Funds in Jersey City, N.J. "If businesses are giving up on innovation, we have problems."

Giving up on innovation? Was that what TheGlobe.com was? No one told me. And now for our final paragraph.

The good news for dividend fans is that it looks like there's ample room for these checks to grow from here. Today, 385 companies in the S&P 500 pay dividends, down from a peak of 469 in 1980. And even though billions are going out the door, dividends only comprise about 32% of payers' profits. Historically, companies have paid out about 54% of their profits as dividends.

So it turns out there’s no issue at all. Dividends are rising and they’re still far below their historic level. Yet somehow the economy was able to grow and innovate in the past. Why can’t the media?

Posted by edelfenbein at November 28, 2005 11:41 AM