Dividend hikes, like Wal-Mart's, aren't always great news for investors

As if beating expectations by posting a 5.1 percent growth in same-store sales wasn't enough, Wal-Mart (WMT) also announced yesterday that it's increasing its annual dividend by 15 percent, to $1.09 a share. That helped boost the world's largest retailer's shares, which rose 2.6 percent on a day the Dow Jones Industrial Average fell another 280 points.

It's certainly unusual for any company to raise its dividend during tough economic times like these. Troubled Citigroup (C) stopped paying a dividend, General Electric (GE) cut its dividend payout, and Google (GOOG) said it is letting its cash "pile up" with no intention of starting to pay a dividend. But -- surprise, surprise -- Wal-Mart isn't actually alone in raising its dividend.

Despite the harsh economic times, and despite many companies reporting lower earnings, about 40 companies in the S&P 500 index have boosted payouts this year compared with about 30 that have decreased or suspended them.

The board at General Dynamics (GD) decided Wednesday to raise its quarterly dividend by 8.6 percent, to 38 cents per share. But, as if to prove that passing more cash back to shareholders won't solve all a company's problems, GD shares slumped some 7 percent to a six-year low yesterday after the company said it would cut 1,200 jobs and expects to post a lower profit.

Sure, investors may be happy about the higher dividend, but they'd be happier to see the company being fiscally responsible in order to better weather this economic storm.

There are plenty of examples:

Not too long ago, Colgate-Palmolive (CL) posted better-than-expected quarterly profits, and last week said it is increasing its quarterly dividend by 10 percent to 44 cents per share. The next day, Kimberly-Clark Corp. (KMB) similarly, raised its quarterly dividend by 3.4 percent, to 60 cents a share. But while Colgate-Palmolive beat expectations in its quarterly earnings, KMB missed when it reported the month before.

And there's Coca-Cola (KO), which also raised its dividend to 41 cents per share, an 8 percent increase. Other companies taking similar steps include Chubb (CB), Thomson Reuters (TRI) and PG&E (PCG). International companies are raising dividends as well, like France Telecom, Linde and other European companies, mainly in oil, utilities and telecom.

In some cases, the company raising dividends announced better-than-expected earnings in the recent reporting period, in others it missed expectations, but oftentimes, profit fell. While some companies managed a revenue increase, others also experienced a revenue drop.

We all know that a dividend is a distribution of a portion of a company's earnings to shareholders, which of course explains the usual positive reaction to such announcements. But is there a point when, despite the promised increased value of the shares, the increase (or even granting dividends at all) may hurt the company and shareholders in the long run? Of course. Distributing dividends becomes a ridiculous practice when the company has no earnings to distribute, or when the company is struggling to get cash.

What's more difficult to understands at times, is shareholders' reaction. Case in point: General Dynamics. GD saw its shares climb on the dividend increase announcement, only to see them plunge a day later when it lowered its outlook and announced job cuts.

It's enough to make investors wonder if that extra money could have have been used to save some of those jobs or shore up the business.

So while Google is playing it safe and being responsible by preparing for the day its cash reserve might come in handy, General Dynamics is taking a different path. Still, investors reacted positively to the GD's dividend increase, but not to Google's announcement.

Investors may love it that Wal-Mart and others have raised dividends. But they should be wary of such moves in these times of uncertainty. Wal-Mart may have no problem supporting this increase, but other companies might and it could hurt them long-term to distribute cash to shareholders, making the short-term gain of such a move completely worthless.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum