CEOs and corporate executives are pushing and shoving their way toward increasing shareholder value by buying back shares and increasing their dividends.
In fact, after years of being an afterthought to the go-go years of the '60s and the Internet boom of the '90s, dividends are once again becoming quite the fad.
Is a dividend that important?
This year, profit margins for U.S. companies will reach their highest levels since 1993; they're increasing to 8.9% in 2011, according to Bloomberg. And companies have stockpiles of cash that they've been sitting on since the financial crisis in 2008, and it's getting to be about that time that they start dishing out some payments.
Out of the S&P 500, 378 companies are forecast to maintain or increase dividends -- out of the 380 that currently pay a dividend. That's quite a solid number.
Who really cares, you might be asking yourself?
Well, since the bull market began about three years ago, companies that return the most money to shareholders have beaten the broad market by about 11 percentage points. Companies with dividends have jumped 3.8% so far this year on average, while companies that do not pay dividends have only climbed by about 2%. Clearly, the market is rewarding companies with the strength to pay out cash, and it's been a pretty significant bonus for investors in those companies.
So which companies are set to soar?
In accordance with their 2008 bailout, banks were forced to slash payments. Now, institutions are clamoring to regain their normalcy in terms of buybacks and dividend payouts.
It's no surprise that banks have been at the top of the list for public companies waiting to reinstate their old policies.
That's why it was pretty surprising today when Bank of America (NYSE: BAC ) announced that the Federal Reserve denied its plan to increase its dividend in the second half of 2011. The company had planned to maintain its current $0.01 payout for the first two quarters of the year, and then to institute a "modest" increase later. Not so, according to the Fed. Accordingly, BOA was down about 3% in mid-day trading.
So which banks will actually increase their dividend and get the Fed's blessing?
- JPMorgan Chase (NYSE: JPM ) and Wells Fargo (NYSE: WFC ) both explained their plans to increase their dividends.
- American Express (NYSE: AXP ) and Goldman Sachs (NYSE: GS ) both announced stock buybacks. Goldman will repurchase the $5 billion stake it had sold to Buffett during the 2008 financial panic.
- Bank of NY Mellon (NYSE: BK ) said yesterday that it's going to increase its quarterly dividend by 44% (to $0.13 per share), while also buying back $1.3 billion worth of outstanding shares.
Many of these companies should likely see a nice boost in their share price as they announce dividend and share repurchase plans -- especially when it's accompanied by the kind words from the Fed. (sorry BOA). Other companies that have requested a dividend increase and have received permission include Citigroup, BB&T, Fifth Third Bancorp, KeyCorp, State Street, and US Bancorp.
However, don't assume that just any bank is going to increase its dividend. Regions Financial (NYSE: RF ) , for instance, hasn't been able to pay back its bailout funds, so it didn't even submit a formal request to the Fed.
The Foolish bottom line
Over the long-run, academics and investors alike have focused on the importance of dividends in order to generate market-beating returns. As we enter the third year of this bull market, it's nice to see that banks are getting back into the dividend game and returning money to the shareholders.
Or if you're just interested in seeing how Bank of America responds to the Fed's slap in the face, then add Bank of America to My Watchlist and get our updates!