If you teach finance, there is a good chance that you have been teaching that dividends are disappearing. This teaching no doubt flows from Fama's and French's 2001 paper that reported firms were cutting back on their dividend payments.
Well, NOT SO FAST! They're Back!! Or at least maybe they're coming back. That is the conclusion of Ikenberry and Julio's interesting look at the ups and downs of dividends.
After a fairly significant drop in dividend payments during the 1990s, firms seemingly have started paying them again. However the authors caution that this may just be a temporary increase in a longer downward
Few things in finance have a longer record of being studied than dividends. It is thus concerning that we really do not have any hard fast conclusions.
On one hand dividends are bad because (as pointed out in Black 1976) there appear to be negative tax conotations to dividends.
On the other hand, paying dividends might limit the resources managers can waste and thus serve a useful bonding role (see Jensen 1986).
During much the 1990s many firms quit paying dividends. This was well documents by Fama and French (2001). However that trend appears to have reversed.
Julio and Ikenberry now have found that firms have returned to paying dividends. They report:
Among all US industrial firms (i.e., excluding financials and utilities), 32%
paid a positive dividend in 1984. By 1999, the last year Fama and French
considered, this percentage had plunged to 16%. The propensity for firms to pay
dividends decreased by half over a 15-year period at the end of the 20th
century, much of this decline occurring in the last five years of the century.
Yet the story shows an interesting twist. This downward trend in the propensity
to pay rebounds after reaching a a low of 15% in the third quarter of 2001. By
the first quarter of 2004, the last quarter for which we have data, just over
20% of industrial firms pay dividends.
They also examine the firms by size:
If we focus on the 1,000 largest industrial firms in any given quarter, we find
in 1984 a much higher overall propensity to pay at about 79%. Over time, these
firms show a downward trend that bottoms out around the third quarter of 2000 at
about 36%. By the first quarter of 2004, the last quarter for which we have
data, the payout rate for these firms had increased steadily by 10 percentage
points to 46%.
While differing in magnitude and the exact timing of the change, they find similar changes for smaller firms.
The authors are careful to not read too much into the reversal:
Although one hesitates to read too much into what may be a brief change in an otherwise downward trend, the evidence indicates a material reversal in dividend policy by Corporate America. One wonders whether earlier notions of the death of dividend policy were not perhaps premature.
Much of the rest of the paper examines why dividends appear to be staging a come-back. Among the possible explanations:
- Tax cut on dividends reduced, but did not eliminate, take disadvantage of dividends.
- Dividends can be used to signal the quality of earnings. This became particularly important in the post Enron world.
- The 1990s were a time where there were unusually good investment opportunities. Thus, firms conserved cash to take advantage of these investments.
- Firms that survived the fallout of the tech collapse are now more mature and a lifecycle hypothesis would suggest they would then begin paying more dividends.
- Investors wanted dividends and thus firms are just catering to their investors desires.
Ikenberry, David L. and Julio, Brandon R., "Reappearing Dividends" (July 2004). http://ssrn.com/abstract=585703