Fewer Firms Issue Dividends, But More Is Doled Out
ANN ARBOR, Mich.---Dividends to shareholders are up despite fewer firms paying them.
A new study by the University of Michigan Business School and University of Southern California says the number of firms that pay cash dividends has dropped by half in the past two decades, but the total amount paid grew by 16 percent. The report found that from 1978 to 2000 aggregate dividends paid by firms increased from $31.3 billion to $36.4 billion after adjusting for inflation. In nominal terms (no adjustments), dividends tripled during that time (to $96.2 billion).
The study will be published in an upcoming issue of the Journal of Financial Economics. It was conducted by Douglas Skinner, an accounting professor at the Michigan Business School and a Neubauer Faculty Fellow and visiting professor of accounting at the University of Chicago Graduate School of Business, along with colleagues Harry DeAngelo and Linda DeAngelo, professors of finance and business economics at USC's Marshall School of Business.
"Prior research has shown a large decline in the number of firms that pay dividends due both to changes in the population of firms that are now publicly held and to a reduced propensity to pay dividends by firms whose characteristics historically would have led them to distribute cash to stockholders," the authors wrote in their study. "Although our evidence confirms a radical transformation in corporate dividend practices over the last two decades, it does not indicate that dividends are disappearing."
The reason dividends have increased despite a significant decline in dividend-paying firms is because the large reduction in payers occurred almost entirely among firms that paid very small dividends (due primarily to acquisitions and secondarily to financial stress), while at the same time, dividends increased substantially among the largest payers, the researchers say.
They say that the changes reflect high and increasing dividend concentration. For example, the 25 largest dividend payers, all of which are "old line" established firms, collectively provided 54 percent of aggregate dividends in 2000. Further, the top 100 dividend payers distributed 81 percent of dividends that year.
Moreover, the researchers say, the earnings that underlie these high dividend payments are themselves highly concentrated. For example, the total earnings of the 25 top dividend payers account for half of aggregate earnings in 2000 and, in real terms, are almost double their 1978 level.
The dividends paid by these firms in 2000 exceed their 1978 level by $7.5 billion in real terms---an increase that is greater than the $5.1 billion aggregate increase for all firms.
"This evidence shows that a relative handful of firms now both dominates the supply of dividends and generates the preponderance of earnings, and that both dividend and earnings concentration has increased substantially from the already high level of two decades ago," the authors wrote.
According to the study, changes in the cross-sectional distribution of earnings are the fundamental reason why real dollar dividends paid by firms have increased even though firms now exhibit a reduced propensity to pay dividends. All of the firms with earnings of at least $1 billion paid dividends in 1978, compared with 85 percent of such firms in 2000.
"Although a smaller proportion of firms with high real earnings now pays dividends, top earners continue to exhibit a very strong tendency to do so," the authors wrote. "And since top-end firms now produce so much more in real earnings, on net, this group shows a large increase in real dividends even though a few very large earners, primarily technology firms, have been slow to initiate dividends.
"Overall, the supply of dividends by industrial firms exhibits a two-tier structure in which a small number of firms with very high earnings collectively generates the majority of earnings and dominates the dividend supply, while the vast majority of firms has at best a modest collective impact on aggregate earnings and dividends."
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