General Electric is more than just an outlier on the Dow for being the lowest-priced stock on Index. The giant is also cutting dividends at a time when many other U.S. companies are pushing them up in a bid to lure in investors.
GE, which has been struggling to downsize in recent years, announced Monday plans to cut its dividends by half, from 24 cents a share on a quarterly basis to 12 cents a share.
So why do dividends matter?
A 12 cent cut may not seem like a lot from a per share basis. But think of it this way: over the past decade, they’ve represented about half of the returns earned by stock investors overall.
Dividends are a portion of earnings that some some companies pay out to shareholders for simply holding onto the stock. Not all companies have these regular payments. Jeff Bezos’ Amazon for example decided against doing so, likely because he believed earnings could be put to a better use.
And for GE, while it 24 cents per share may seem paltry, consider the payouts of investors who actually hold onto the stock. Before GE’s most recent cut, dividends represented more than $8 billion in income for investors yearly. GE also was the the seventh-best paying dividend stock on a dollar-basis on the S&P 500 before Monday.
“Many investors own GE for the dividend, so it’s disappointing, but it’s also not very surprising that they had to cut,” said Allianz Global Investor’s Burns McKinney in a email Monday, as the company’s share price slid 7.2%.
Why do some companies want to give out dividends?
Though the Federal Reserve cut interest rates following the Financial Crisis in a bid to jump start the economy, U.S. giants decided against investing research and development — and instead, rewarded their shareholders with dividends and stock buybacks.
“The low interest rates that were intended to drive businesses to invest in their growth and take some entrepreneurial risk instead had the opposite effect,” according to an LPL Financial report.
To some extent, that appears to have continued in 2017, with earnings have grown this year amid stronger economic outlook both domestically and abroad, the majority of U.S. companies on the S&P 500 have though have raised their dividend payouts. According to Howard Silverblatt, a veteran market analyst at S&P Global, 310 companies have hiked their rates this year, adding $36.3 billion to annual dividend payouts. The hikes are expected to lead to a sixth consecutive year of record-breaking dividend payouts, according to the analyst.
“I believe the overall dividend picture is very positive, as companies have record earnings, with cash also at a record,” Silverblatt wrote in a Monday note.
One reason why companies may choose to pass on their growing cash flow as dividends: to keep shareholders happy and buying. Unlike Amazon, whose stock jumped 57% in the past year, GE isn’t considered a growing company — if anything, it is shrinking. So instead of using its earnings to break into new markets, GE is passing what it can to shareholders as a steady form of income.
For companies, issuing dividends can also be a sign of financial health: it’s a message that it can afford such payouts. But not all high yielding dividend stocks are a sound investment. It can be a bad sign when a company’s dividends outpace its available free cash flow.