3 Dow Members That Need to Raise Their Dividends
Companies in the Dow Jones Industrial Average have been selected for this index in part because of their long histories of generating consistent profits and returning capital to shareholders. However, a couple of newcomers to the Dow — as well as one company that has been a part of it for a while — focus too much capital on stock repurchases and not enough on dividends.
Now stock repurchases aren’t necessarily a bad thing. In fact, stock repurchases have a tax advantage over dividends insofar as dividends are taxed whereas a share buyback program is a way for companies to return capital to shareholders that isn’t taxed. But dividends attract investors who need income. Also, a dividend signifies confidence in earnings. While a share repurchase program can be eliminated or suspended, a company’s devotion to its dividend is far more binding. Thus, as an investor, I want to see companies with strong histories of profitability such as the three I’m about to mention devote more capital to dividends. I think it will engender more shareholder confidence and attract a new class of investors.
Visa (NYSE:V) is a new Dow component, and considering its integral role in the U.S. and global economy, this selection is justified. The company is extremely profitable, it has high margins, and it is growing its eanings in the double digits. However, while it has a history of paying a dividend and raising it, the dividend is way too low compared to its profitability. Right now, it is about $1.60/share, or 0.8 percent. This is less than 20 percent of its profits despite the fact that Visa has limited capital expenses and steady income. The company can easily raise its dividend 30 percent – 50 percent and the only change it will have to make is to reduce the amount of stock it is repurchasing. If it does this, it will still have a fairly small dividend, but considering its growth it will be able to raise it regularly, and it will benefit long-term shareholders while attracting income investors.