NEW YORK (CNN/Money) - General Electric says it isn't a growth company anymore -- and investors are cool with that.
OK, maybe GE didn't flat out say that it isn't a growth company, but what it did say came to same thing. First, the big conglomerate cut back its earnings expectations: for 2002 and 2003 it only expects yearly earnings growth of 7 percent or so compared with the nearly 15 percent it's delivered over the past decade. Second, it said it will bump up its quarterly dividend by 6 percent to 19 cents a share, which gives it a dividend yield of 2.8 percent.
GE shares jumped $2.05, or 8.2 percent, to $26.85.
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Granted, GE's bad news wasn't exactly news (even some Wall Street analysts expected it), but it was surprising to see the market basically ignore it and focus instead on the higher dividend. The message may be one that other companies might consider listening to: Investors would rather put their money into a company that is going to give them some sort of guaranteed rate of return than in one that is hell-bent on growth.
"The late-90s model -- which was always a mirage and a lie -- doesn't fly anymore," said Cliff Asness, managing principal at the hedge fund AQR capital. "It's good for companies to pay dividends."
Paybacks are swell
Under the late-90s model, paying a dividend was something like the kiss of death. It meant that, in the midst of the greatest technological revolution the world has ever known, a company couldn't think of anything better to do with its money than (gasp) give it back to shareholders. A smart company would use the money it earned to help foster growth, developing new businesses, launching new projects and the like.
Which is a nice idea, but not the way it really works out. Work that Asness has done with Rob Arnott of First Quadrant has shown that earnings grow fastest when the market's dividend payout ratio is the highest, and that, conversely, low dividends lead to low earnings growth.
"Our guess is that it's because management does bad things with their cash," he said. "You get a bunch of guys interested in empire-building, personal aggrandizement, laying optical cable across the Pacific and generally having an open cookie jar."
In an era where many investors, thanks to a tough three years, are becoming more interested in capital preservation than capital accumulation, dividends are back in favor.
"For almost ten years, nobody asked me to structure a dividend-yield portfolio," said Stanley Nabi, managing director of Credit Suisse Asset Management. "Now I'm getting calls from a lot of clients asking for one."
Divvying up the cash
Some big companies, particularly in the technology arena, are getting calls from dividend-hungry investors. Microsoft, Dell and Cisco, for instance, all have lots of cash. So far they're not biting.
"They don't want give out a dividend because they think they'll give up their growth stock status," said Merrill Lynch strategist Kari Pinkernell. "But they aren't growth stocks anymore."
The ostensible reason not to give out dividends is that Congress substantially increased taxes on them in the 1990s. There are a number of bills before Congress aimed at changing the way dividends are taxed.
If changes go through, some companies are going to run out of excuses. Earlier this week, Cisco said its shareholders had voted 10-to-1 against a dividend payout. Management had opposed a dividend -- because there were better ways for the company to use the money, they said, and because of the tax issue. It must be nice for them to get to still have $25 billion in cash to play with.
Which is why even if the rules don't get changed, some market watchers think that a lot of companies should start paying.
"The reality is they're not paying out enough anyway," said James Montier, global investment strategist at Dresdner Kleinwort Benson. "There are all these companies that are sitting on top of cash hoards. The next big battle for corporate governance is for companies to start paying dividends again."
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