The attitude on dividends: Just don’t make it permanent
In spite of 18 straight quarters of double-digit profit growth and estimated fourth quarter 2006 cash holdings of $608 billion, U.S. companies seemed to maintain an iron grip on their ordinary dividend payouts in 2006. According to a recent report from Standard & Poor’s, only 1,969 companies, or 28.1%, out of 7,000 publicly held stocks raised dividends in 2006—only 1% more than in 2005. Instead they opted increasingly for one-time dividend payments and special dividends—which jumped 14.3% to 622 in 2006, up from 544 in 2005. “Companies are still timid [following] the decline of the market in 2000 to 2002,” says Howard Silverblatt, a senior analyst at Standard & Poor’s. Moreover, managements are loath to raise ordinary dividends “because there’s a big penalty for cutting [them],” he says. “An ‘extra’ is a single event, a special situation—you do not have to repeat it. And what it does is it gives you a little bit more time to formulate your policy and see what 2007 is going to look like.”
Perhaps the biggest disappointment last year, notes Silverblatt, was the dividend policy of technology companies. “We expected more [from all the companies]. But we specifically expected more from technology companies,” he says. “We started 2006 with lots of talk about tech starting to pay dividends. We saw some increases, but we didn’t see the increases that we expected from technology companies.”
But a degree of caution may be justified. While corporate profits have enjoyed a spectacular run during the past four and half years, profit growth in 2007 is expected to be in the high single digits at best—and there are economic storm clouds gathering, with continuing questions about the future of both consumer spending and the housing market. Still, the ratio of cash to market capitalization of companies stands at 6.44%, as opposed to 2000, when the ratio stood at 2.53%. “Looking back historically,” says Silverblatt, “you have to go back to 1988 to get those kinds of numbers.” That ratio is especially striking, notes Silverblatt, once you factor in how inexpensive it is to borrow in the current environment in contrast to 1988, when the cost of cash was 10%. “No matter how you measure this, there’s enormous liquidity sitting on the books of these companies,” he says.
Companies are also opting to use their cash to fund another alternative to reward shareholders—share buybacks, such as the $20 billion one by Microsoft Corp. this summer. Says Silverblatt: “It used to be that companies would talk about buybacks and dividends and they’d lump them together. Now, it’s just buybacks.” And unlike dividends, which are used according to the investor’s discretion, shares that are bought back remain at the discretion of management. Buybacks, like “extras,” are one-shots: they prop up share prices and temporarily lift earnings per share. “We have concerns about buybacks,” says Silverblatt, adding: “At some point, buybacks have to stop.” Silverblatt predicts that the buybacks will end soon, as companies gear up to spend that “war chest of repurchased shares” on a fresh round of mergers and acquisitions.
The urge to merge is back in the air
While spring may still be months away, the thoughts of corporate finance chiefs are already filled with visions of corporate matrimony. More than a quarter (27%) of CFOs surveyed recently by Robert Half Management Resources expect mergers and acquisitions to heat up in the next 12 months; at larger companies with 1,000-plus employees, 32.9% expect a surge.
Over the next two to three years, 48% of those surveyed expected to see a significant uptick. Robert Half conducted the survey of 1,400 CFOs of U.S. companies in August and again in late October 2006.
Not surprisingly, the primary drivers of this anticipated M&A activity are the record corporate cash coffers built up in the current business expansion cycle and an easy credit market, where interest rates have remained stubbornly low in the face of the Federal Reserve’s efforts to raise them. The sectors where CFOs expect the most activity: transportation (44%), finance (42%) and manufacturing (38%).
However, CFOs polled were not bullish about the prospects for initial public offerings increasing, with only 8% predicting a surge.
UnitedHealth Group Inc. named G. Mike Mikan executive vice president and CFO of the $45.4 billion managed care provider, which is based in Minneapolis. Mikan, 35, was senior vice president of finance of UnitedHealth from February 2006 to November 2006 and served as CFO of the company’s UnitedHeathcare division, a $35 billion operation, and as president of UnitedHealth Networks from June 2004 to February 2006. He succeeds Patrick Erlandson, who resigned as CFO and will be assuming operational duties within UnitedHealth. Erlandson has been CFO since 2001.
Gannett Co. promoted Jane Ann Wimbush to vice president of internal audit from director of internal audit for the $7.6 billion media and newspaper company, which is based in McLean, Va. Prior to joining Gannett in 2003, Wimbush, 56, held various positions at Protiviti Inc. and its predecessor from 1996 until she joined Gannett.
Timken Co. named Philip D. Fracassa as senior vice president of tax and treasury of the $5.2 billion bearings manufacturer, which is headquartered in Canton, Ohio. Fracassa, 38, will oversee global tax reporting, planning and strategy as well as treasury activities. Fracassa has served as vice president-tax since joining the company in 2005. Prior to coming to Timken, he was director of taxes and senior tax counsel for Visteon Corp.
St. Joe Co. appointed Michael N. Regan CFO of the $938.2 million real estate company, which is based in Jacksonville, Fla. He replaced Anthony M. Corriggio, who is leaving the company to pursue other opportunities. Prior to joining St. Joe, Regan, 59, was vice president and controller for Harrah’s Entertainment Inc., the casino operator. Regan has been St. Joe’s senior vice president of finance and planning since 1997 and served as the company’s interim CFO from 1998 to 1999. Regan plans to retire in mid-2007.
Airgas Inc. appointed Thomas M. Smyth as vice president, controller and chief accounting officer of the $2.8 billion industrial gas manufacturer, which is based in Radnor, Pa. Smyth, 53, fills the vacancy created when Robert M. McLaughlin was promoted to senior vice president and CFO of the company. Smyth had served as vice president for internal audit since 2004. He joined Airgas in 2001 as director of internal audit. Prior to joining Airgas, Smyth served at Philadelphia Gas Works in internal audit, controller and chief accounting roles. Previously, he served in similar roles at Bell Atlantic (now Verizon) and at Amtrak.
Murphy Oil Corp. appointed Kevin G. Fitzgerald senior vice president and CFO of the $11.9 billion oil and gas explorer and producer, which is based in El Dorado, Ark. Fitzgerald, 51, has been treasurer of Murphy Oil since July 2001. Prior to that, Fitzgerald was director of investor relations from 1996 to June 2001. He joined the company in 1982 as assistant treasurer.
Murphy Oil Corp. appointed Mindy West vice president and treasurer of the company. West, 37, replaces Kevin G. Fitzgerald, who was named senior vice president and CFO. West joined the company in 1996 and has held a range of positions in accounting, human resources and planning.
Alliant Techsystems appointed Steve Wold treasurer of the $3.2 billion defense company, which is based in Minneapolis. Wold, 40, joined Alliant in 1995 and has held a series of finance positions of increasing responsibility, including most recently, vice president of investor relations. Wold will continue to serve as head of investor relations until a replacement is found for him.
Article found in People on the Move