This month marks the five-year anniversary of an era many
would rather forget.
The S&P 500 fell nearly 10% in June 2008, and investors
began to brace for an eventualmarket crash later in theyear .
That was also a time when companies sealed the hatches and girded
for tough days ahead, in many instances eliminating dividends
that had been in place for many years.
Though many companies eventually restored those dividends,
some companies are only now contemplating such a move. By
following a few simple markers, you can make some well-informed
predictions about which companies could soonissue a freshdividend
Before digging into these markers, let's take a quick look at
the 15 largest companies in the S&P 500 that do not currently
pay a dividend.
Right away, we can eliminate certain types of companies from
contention, simply because they have had many decades to pursue a
dividend policy, and never have done so.Warren Buffett 's
Berkshire Hathaway (NYSE: BRK)
is a perfect example. His company is such an activeacquirer of
businesses that retainingcash flow is a key ingredient of
This, of course, may change when Buffett relinquishes control.
After all, Berkshire has now generated more than $10 billion
infree cash flow in each of the past four years, after never
having generated more than $7.2 billion in free cash flow in any
prior year in its history. The company's grosscash balance
reached $47 billion at the end of 2012, and the topic of a
dividend is surely raised at the company's board meetings.
For that matter, it's unwise to expect an imminent dividend
from the other two $100 billion companies on the list,
Amazon.com (Nasdaq: AMZN)
Google (Nasdaq: GOOG)
. These companies are aggressivelyinvesting in future growth
initiatives in their bid to conquer the technology
Neither company is showing signs ofmaturity just yet -- but
it's hard to ignore Google's ever-rising free cash flow, which
hit $13.3 billion in 2012, or its $48 billion gross cash balance
at year end. If Google used all of its free cash flow for a
dividend, then the payout would be $40 a share, good for a
Earlier, I noted key markers to look for. Free cash flow and
current cash are two of them, along withcapital spending. A great
industry example is Big Pharma, which includes major drugstocks
These firms long ago realized that that free cash flow handily
exceeded their capital spending needs (mainly research and
development), and to attract investor interest, a dividend made
sense. (A caveat: These companies are growth constrained and
often can't afford dividend hikes. Merck's dividend, for example,
has barely budged since 2004).
Yet you'll notice a pair of large biotechs on the table above,
Gilead Sciences (Nasdaq: GILD)
Celgene (Nasdaq: CELG)
. With each passing year, these companies are starting to
resemble the Big Pharma stocks with their rising free cash flow
that now exceeds capital spending. Why don't they pay dividends?
Short answer: Theywill .
In fact, biotech pioneer
Amgen (Nasdaq: AMGN)
has already kicked off the trend, with its first-ever dividend in
2011 (for 56 cents a share) and a payout that now approaches $2 a
Not paying a dividend made sense for Celgene in 2004 through
2008, when the company generated an average annual free cash flow
of $125 million. That figure hit $800 million in 2009 and $1.6
billion by 2011, and is on track to exceed $2 billion this year.
Gross cash now exceeds $4 billion, even after Celgene has
acquired a variety of smaller biotechs over the past five
The fact that Gilead Sciences has never had a dividend is even
more perplexing. Free cash flow has averaged $2.5 billion a year
over the past five years, and as I noted this week, a
soon-to-be-approved new drug may take that cash flow even
In the past few years, Gilead has taken advantage of a
weakstock price to buy back more than 300 millionshares . Yet
with shares now breaking out to new heights, buybacks make less
sense. Of these two, Gilead looks to be a first mover interms of
a dividend initiation, though Celgene and
Biogen Idec (Nasdaq: BIIB)
may not be far behind.
The No-Brainer Pick
Yet there is one company on the table above for which a dividend
-- and a good one at that -- appears to be in the offing. It's a
company that once paid out annual dividends in excess of $10 a
share, was decimated by the 2008 financial crisis, and is now
alot healthier than many realize.
I'm talking about
American International Group (
, the once-reviled insurer that needed a massive
governmentbailout but has since exited many risky lines of
business. AIG now focuses on a pair of insurance lines (life and
property/casualty) that generate steady predictable cash flow. In
2012, free cash flow exceeded $3.5 billion, andanalysts see that
figure hitting $5 billion by next year. With 1.7 billionshares
outstanding , a $2-a-share dividend would be quite feasible, and
as interest rates rise (boosting AIG's returns on its gross cash
holdings), this dividend could climb higher from there.
Frankly, with shares trading well below tangiblebook value of
$65 a share, a stock buyback makes even more sense.CEO Robert
Benmosche discussed both of these options in a recent interview
Risks to Consider:
Dividend growth has been a keyinvestment theme in recent
years -- yet as we saw in 2008, a weakeconomy can lead to
dividend cuts, so don't be alarmed if your dividend-paying stock
does so. History says that dividends will be back at full
strength after the economic weakness passes.
Action to Take -->
Don't just focus on companies that don't yet have dividends. Some
companies that have only recently begun tooffer a payout also
have the potential for robust dividend growth. My favorite
, which in my view could triple its current 40-cent-a-share
dividend over the next few years without making a dent in
thebalance sheet .
If you are looking for potential dividend initiators, focus on
companies with a history of solid and rising free cash flow,
manageable (and preferably falling) levels ofdebt , and minimal
needs for cash in terms of capital spending or acquisitions.
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