Are dividends back?

0:06Pushkin. The social media giant Meta, maybe you've heard of it, recently announced for the first time in its corporate history, a dividend, a little payment to shareholders. And even though it was small, it riled imaginations on Wall Street and got people thinking about what does it mean that a massive tech company, which was supposed to be in a growth phase, is now doing something more characteristic of bigger, older companies. Today on the show, we ask, are dividends back? This is Unhedge, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in New York, joined from London by Marcus columnist Katie Martin, who has recently been holed up reading books about the history of dividends.

0:54Well, yeah, but at least I'm not holed up in the snow like you are trapped in your home. I've made peace with the fact that, you know, today in New York there's a snowstorm. I'm not going outside. Who needs to do that? Inside for me. All day. Okay. I respect that. But I don't think I'm going to be nearly as productive today as you have been recently, Katie, pouring through tomes on the history of dividends, financial markets. I mean, what exciting stuff. This is how I roll, Ethan. I'm a very cool person. But yeah, I was reading a book about dividends, the decline and fall of dividends and how and whether they might come back by a chap called Daniel Paris, who's an investor at Federated Hermes.

1:31His book is called The Ownership Dividend. That might sound like a slightly dry topic, but it's actually quite good fun. And anyway, there I was, you know, thinking about dividends. And what do you know? Meta pops up and says, okay, shareholders, we're going to pay you 50 cents a share per quarter in our very first dividend. Now, do not spend this all in the one shop, Meta shareholders. This is not a large amount of money. This is going to equate to a dividend yield of a mighty 0.42 % a year. So the amounts of money that we're talking about here for most shareholders are like fairly trivial, but the signal that this sends from a big whiz bang, look at us, we do exciting things in the metaverse company like Meta is actually pretty substantial.

2:17Yeah. So it's weird that we're even talking about this, right? I mean, for the longest time, I mean, long before I was born, but I have heard that - Even before I was born. It was just an expectation before you were born, before any of us were born. It was just an expectation in markets that if you're a big profitable company, you're going to pay a dividend, right? And stocks are, as you learn in the first year of an MBA, the discounted sum of your future cash flows and dividends just represent those cash flows going from the company back to investors. But that kind of simple first year MBA model, that hasn't really quite been the trend recently, has it Katie?

2:53No, I mean, dividends have had a bit of a bad time over the past couple of decades. If you cast your mind back to even before ancient people such as myself were born to like 100 years ago, the whole deal was you had a relationship between a company that listed on a stock market and its shareholders. And the solid expectation was that unless a company ran into some sort of serious difficulty, then it would stick to its commitments to pay a dividend to shareholders. And dividends were much more generous back in the day. So if you go back kind of 80 or 100 years or something, then shareholders could reasonably expect to get a dividend yield of the S &P 500 or something equivalent to it of like 6%, 5%.

3:36You know, this was a meaningful amount of money that companies would pay you in the form of a dividend. And you could do two things with that. You could either take the cash. Thanks very much. That's a bit of money. I'm going to, you know, spend it on whatever I want. Or you could like plow it back into the market. Just keep on buying more shares. And so if you add that component into a stock market, it actually makes a really meaningful difference to how much actual money investors make out of it. Because although like dividend yields in the US have collapsed from something like 5-6 % to under kind of 2 % for most of the past couple of decades, other markets actually are much more dividend friendly.

4:13So Italy, for example, the dividend yield is more like 4%. And so there are big cultural differences here in terms of this relationship between companies and their shareholders, which I sort of think is interesting in and of itself. But the point is, dividends have been in this kind of long march towards death in the States, where they've just shrunk massively, particularly over the past couple of decades. There's a million different reasons for that. But this move by Meta suggests that maybe some of this might be coming back. Maybe they're back. That's at least the question anyway. And just to underscore your point about how important dividends have been to returns in US stocks, I took a look just yesterday in the Unhedged Newsletter at the past century, right?

4:55Using this great S &P database. And their numbers show that in the past century, since 1926, if you were a buy and hold investor of the S &P 500, fully 38 % of your total return came from just collecting those dividends and plowing them right back into stocks. And it's because of the same reason that any investments go up, compounding over time, right? You're buying at a low price, the prices tend to go up, and you get that compounding effect over a long time horizon. But that 38 % number has not really been the case, especially in the last decade. The more recent numbers, so I looked at 2013 to 2022, dividend reinvestments have fallen from 38 % of total returns to just 17 % of total returns.

5:39So just a much less significant portion of what a buy and hold investor makes holding U.S. stocks these days. Yeah. And so, you know, particularly kind of high growth U.S. companies of which, you know, you can definitely put meta into that kind of basket. The relationship that they have had with shareholders over the past couple of decades has been different. It has not been, OK, we're going to spend the money that we need to spend on growth and on paying the bills and all the rest of it. And anything that's left over is for all the shareholders to divide up and receive as a dividend. it's been hello i'm a big fast-growing company buy my shares and i'm going to make damn sure they go up and and that's just different that is a different kind of mindset for investors to be in it is um the idea that either i'm making a winning bet this is a company that's going to grow fast and i'm going to be part of it or i'm going to buy shares in this company and i'm going to find a bigger idiot to buy them off me another day in the future and that's how i'm going to make my money off it.

6:37And so to the mind of people like Daniel Paris, who wrote the ownership dividend, that's like a casino. That's like not terribly different to just buying crypto or buying gold or just buying any other non-yielding asset. It's all just reliant on the greater fool theory. This reintroduction of dividends that we're seeing, and again, meta dividends are small and much, much smaller than their buybacks. But it does just say, okay, we want to have a different type of relationship with our shareholders. It's a long-term relationship. And I'm going to give you the signal that come hell or high water, I'm going to pay you X amount of money every quarter.

7:13Yeah. It is odd. I think we have to say that the story of Meta is being told as a coming of age story when this is a company that is still growing revenue in the past year at 17 % year over year, operating profits at 46 % year over year. I mean, that does not seem to me like a stayed, mature company that's just trying to reward the long-term faithful in its corporate story. This is still kind of a growth company. It's just pivoted toward being a little bit more shareholder friendly. And I mean, you definitely can't divorce that from the stuff that's been happening to Meta specifically, right? It had this period where the stock was down as much as 70 % at some point because investors hated, hated, hated what Zuckerberg was doing with the metaverse.

7:56They thought he was pivoting away from the company's core competencies, He's burning all this money on this faraway project that may or may not pan out. And in the past year or so, he's had this so-called year of efficiency. And he's tried to kind of steer the ship to be a little bit more shareholder friendly. And this dividend component is just sort of part of that story. But it does raise the question, Katie, if a company still is fast growing and new as Meta is moving toward dividends, and we are in an era of higher rates. So reversing one of the factors that helped push dividends down in the past several decades, is there possibly a new regime for dividends starting to take hold?

8:34And you're seeing these predictions or even these proclamations in the financial press. There was a piece in The Economist just last week saying very confidently, dividends are back. Yeah, they're so hot right now. I mean, a couple of points on that. One is that one of the reasons why dividend-focused investors that I speak to are kind of so cheered by this news from Meta is that it kind of really illustrates that this idea that the world divides into dividend paying stocks or exciting fast growing stocks is rubbish. You can be both. So that's why they're kind of so happy to see this is that, you know, it might be that there are other fast growing US companies that are listed that also take the same sort of step.

9:17But the other is that one of the things that, you know, in the past, when companies routinely paid large dividends, the big signal was not paying it or cutting it. It was like a way of effectively telling the market, lads, we're in a bit of trouble here. Like either COVID has hit, you know, which is a perfectly reasonable reason to cut in your dividend, or we've done something kind of strategically wrong and something has gone wrong and we're very sorry, but we can't pay you a dividend. So there was a period in the past where it was a red flag and dividends were a good kind of disciplining measure on the market.

9:52And the hope for people who love their dividends is that this era is going to come back and they're going to just see a bit more common sense injected back into which companies do well on stock markets and which companies don't. And it's not just all about vibes. Well, Katie, the vibes in the past decade or so have been a lot less about steadiness and a lot more about we to the moon. And alongside that, there's been sort of a displacing effect where dividends have given way to a newer way of returning cash to shareholders through share buybacks, right? And these, unlike dividends, where you have to pay it every year or the cultural expectation is, what the heck, guys, what's going on?

10:31Why did you cut the dividend? Buybacks are a much more flexible way for companies to give cash back to shareholders. They're not penalized really for doing a buyback one quarter and then not doing it the next quarter. It's purely discretionary. And you can just do an offering at the market price and buy back the shares, retire them. It's pretty straightforward and investors have come to expect it. You combine that with the, in some ways, preferential tax treatment of share buybacks where investors can kind of opt into it, right? If they want to have the tax liability in that year or not, whereas dividends are taxed whenever you receive them.

11:07Between those two things, I mean, you can tell a decent story about why dividends have fallen off and why the sort of steady payments that investors of a generation ago were used to have fallen so far. So we should return to the question we started the whole show with Katie, which is, are dividends back? I mean, I think you've made the case that there's at least a foundation for it. And I mentioned that economist piece, and there are others in the Wall Street world talking about this trend. I had a look at the data in yesterday's unhedged newsletter. And to me, it seems like, yeah, again, maybe they're starting to come back, but the answer is really no, they're not back yet.

11:43And just to put some numbers on that, right? After the 2008 financial crisis, S &P 500 dividends took a big step down. They have not recovered to the 2000s trend yet. dividend growth in the past year was about 5 % to 6%, contrasting that to the 10 % dividend growth we got in 2022. So dividend growth has actually been slowing a little bit. And Howard Silverblatt, who's a great dividend analyst at S &P, made the point to me that it just reflects general corporate caution. We were talking about recession for sure, 100 % six months ago, and now it's soft landing, woohoo. But what's it going to be in six months?

12:20And again, And because of that expectation that dividends are not just now, but forever, companies don't feel as liberated in an uncertain economic outlook to just go and inaugurate those dividends. They want to be a little bit more cautious about it for now and wait till the picture gets a little bit clearer before starting to commit to that. Yeah, but I slightly take the other side of that and say, you know, if you are a company that is super confident that you've got this and you can weather any kind of economic weather, then this is a really good way of making that message loud and clear to your shareholders.

12:53So, you know, I don't think Meta's initiation of a dividend necessarily changes the world, but I do think that it sends a pretty big signal that, you know, if you're a rival company that's competing for, you know, investment dollars, then it's like, well, why aren't you doing this? You know, so it just raises that question. And I think we might come and look back on this moment in a few years time and say that this was when it all started to change. Yeah. I mean, it sounds very much like the way of the future is just the way of the past. back to the future, man. It's like old school is the good school.

13:27All right, Katie, we'll be back in just a moment with Long Short.

13:42Welcome back. This is Long Short, that part of the show where we go long a thing we love, short a thing we hate. Katie, I am short micro trends, okay? This is a phenomenon predominantly on TikTok, but also other forms of social media where people make up like fake BS trends as a way of like engagement farming. And lest you think I'm just talking about something I saw online, this was on the front page of the Wall Street Journal this weekend, the micro trend called orange peel theory, where if you want to see if your partner really loves you, you ask them to peel an orange for you. And if they don't, then they must not really love you.

14:16And these type of mini social media phenomenon that are truly, truly, truly just constructed to piss you off and make you argue about whether this is really a thing or not have taken the world by storm. And I'm against them. They suck. I'm strongly against that. But now I'm hoping that. So I saw something about a new fashion trend on social media the other day. Apparently, the new look that is in is the frazzled English woman look. And I am nailing this look. and I want it to be a real thing. If you come back and tell me this is a silly micro trend, I'll be really upset. So look, I will be long two things.

14:55I will be long of the frazzled English woman look, nailing it. And I'm also limit long the story in New York magazine about Bill Ackman, which if you haven't seen it online, do yourself a big favor and read it. It is proper funny. No notes. It's so funny. It is so unintentionally funny. Bits that kind of stick out at me is that Bill Ackman, you know, big kind of hedge fund guy who kind of led the ouster, as you Americans like to say, of Claudine Gay from Harvard University. And he's left the defense of his wife, who has been accused of plagiarism on some of her academic work. And he says that he's causing strife in marriages across America because he's hearing of some husbands who email their wife, question mark, to say, honey, I did the dishes.

15:51And the wives come back to them and say, big effing deal. Did you see what Bill Ackman's doing for his wife? He also reveals in this piece that he did the quiz on FT Alphaville, which is a big Bill Ackman or American Psycho. Like all these kind of little quotes where you have to select which one is. And he says, I got a perfect score. kudos bill well done i just well done i could not love this story more it's just hilarious that he did a quiz about himself and is now congratulating himself for getting all the questions right love it please read that magazine story if you hadn't listeners you will get a kick out of it all right katie thanks for being here we'll have you back soon and listeners we're back in your feed on thursday with another episode of unhedged catch you then unhedged is produced by jake harper and edited by brian erstat our executive producer is jacob goldstein we had additional help from topra forres cheryl brumley is the ft's global head of audio special thanks to laura clark alistair mackie greta cohn and natalie sadler ft premium subscribers can get the unhedged newsletter for free a 30-day free trial is available to everyone else just go to ft.com slash unhedged offer.

17:08I'm Ethan Wu. Thanks for listening.