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Corporations Slash Dividends, Boost Buybacks: Q3 2005

Posted By John Schroy On 22nd January 2006 @ 05:27 In Corporate Managers | Comments Disabled

American corporations reduced the amount paid shareholders as dividends, on a annual basis, to the lowest level in nine years. ([1] Federal Reserve Flow of Funds Accounts, Q3 2005, Table 102).

Although after-tax profits were 56% higher than last year, annual dividend payouts as of Q3 2005 were only 58% of amounts paid as dividends in 2004.

At the same time, companies radically increased amounts spent on repurchasing and retiring equity to an extraordinary annual rate of $446.2 billion, which was greater than the total amount spend for this purpose over the previous five years.

Resistance in Sustaining Stock Prices

Amounts distributed as buybacks and dividends exceeded after-tax U.S. corporate profits for the ninth straight year.

Despite strenuous efforts by company executives to use buybacks to manipulate stock prices upwards and give value to their stock options, the S&P500 index increased only 2.8% in Q3 2005.

Given the over-valuation of stocks in historical perspective and the extreme level of highly motivated corporate buybacks intent on pushing prices higher, this degree of price appreciation appears relatively mild and could be interpreted as a sign of weakness in support for current stock price levels.

(See [2] articles on stock valuation on this site.)

The graph shows distribution of after-tax corporate profits since 1995 (Source: Federal Reserve FOF Accounts):

Distribution of After-tax Corporate Profits
 
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URLs in this post:
[1] Federal Reserve Flow of Funds Accounts, Q3 2005, Table 102: http://capital-flow-analysis.info/flow-of-funds/F102.htm
[2] articles on stock valuation: http://capital-flow-analysis.info/investment-theory/stock-valuation.html
[3] corporate profits: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=corporate-profits
[4] dividends: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=dividends
[5] stock buybacks: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=stock-buybacks
[6] stock market: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=stock-market
[7] stock options: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=stock-options
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