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At first glance, dividends would appear to be diminishing in importance among U.S. corporations. Of 7,500 dividend-paying companies tracked by Standard & Poor's, 1,426 increased their dividends in the first 10 months of 1999, down from a peak of 2,171 in the first 10 months of '96 and the lowest rate since '93 when 1,290 companies raised their payouts in the same timespan.

But, in reality, many corporations continue to consider the dividend to be an essential component of shareholder return. A 1998 survey of 110 S&P 500 companies conducted by asset management firm Spare, Kaplan, Bischel & Associates found that 87 percent viewed a dividend increase as a valuable signal to investors. "It's public inside information on the board of directors' thinking about the earning power," says Andrew Bischel, the firm's president and director of investments. "If the directors raise the dividend, they think the earnings power is greater."

At the same time, there has been a marked change in how companies view dividends, increasingly seeing them as part of a total pay scenario that includes stock repurchases and stock appreciation. Of the companies in the Spare, Kaplan study with buyback programs in place from 1996 through 1998, 72 percent raised the dividend as well.

USG Corp. shifted to total payout mode in 1998. Until 1988, the Chicago-based building materials company had paid a dividend for many years. But in order to defend itself against a takeover, it raised its debt level from $750 million to $3 billion, paid out a huge cash dividend to shareholders, and ceased all regular dividend payments. Only at the end of '97 did USG work its debt down enough to regain investment grade status and begin reconsidering a dividend. In September of 1998, the company resumed its dividend payments and began a buyback program with a new total pay approach in mind.

USG set an eventual target of 25 percent of net profits plus depreciation to be paid out in dividends and share buybacks. The intention was to move to that level after 2000 when it is scheduled to complete a vital capital spending program to retool the company with lower cost manufacturing capability and set the stage for faster earnings growth. But, "we did it a year early as a measure of confidence and to send strong signals to the market," says CFO Rick Fleming, adding that "we thought it would be helpful to compensate shareholders now while they were waiting" for the earnings to develop.

This past November, USG doubled the pace of its annual stock repurchases to 2 million while also hiking its per share dividend from 40 cents to 60 cents. At the same time, it announced that it expected record earnings in 1999 and 2000.

In mid-'99, Applied Signal Technology, a Sunnyvale, CA, maker of digital signal processing equipment for the defense industry, paid its first dividend of 25 cents per share annually. The plan was "born of the frustration that the market was not giving the company a reasonable valuation," even though the company had been completing about one share repurchase program a year, says CFO Brian Offi.

Applied Signal had two main problems in the stock market. For starters, its niche customers, government intelligence agencies, did not represent a growth market. Meantime, the company was competing for capital with infrastructure providers in the red-hot telecommunications and Internet sectors. "We didn't see that changing for a while," says Offi.

Given its rich cash position, a dividend made sense. Within two hours of announcing the dividend last June, "there was a measurable movement in the stock price," Offi says. From a low of 5 in early '99, the stock was up to 13 3/8 by November.

Even utility companies that, in a deregulated market, have been changing their stripes from stable earnings to rapid growth still believe there is a role for a dividend. Take Peco Energy, a Philadelphia-based electric utility. In January, 1998, Peco cut its dividend from $1.80 a share to $1 a share (or $1.69 after a pending merger with Chicago-based Unicom), slashing the payout ratio in half from the high yield of a traditional utility to about 30 percent. The dividend reduction saved the company money--about $180 million a year--that it needs to plow into its growth strategy and keep up with the competition.

But, at the same time, Peco does not want to sacrifice the entire dividend for its growth needs. "We're looking at total shareholder return," said CFO Michael Egan. "We intend to provide excellent returns with both appreciation and the dividend."

Hilary Rosenberg is a business writer who has written for the Sunday New York Times and Business Week.
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Author:Rosenberg, Hilary
Publication:Chief Executive (U.S.)
Article Type:Brief Article
Geographic Code:1USA
Date:Feb 1, 2000

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