Dividend Trends for 2022
Morningstar’s U.S. markets strategist Dave Sekera shares his expectations for dividend growth and share buybacks this year.
The following is an excerpt from the video series Dividend-Stock Deep Dive, hosted by Morningstar DividendInvestor editor David Harrell. Watch the full interview.
David Harrell: In 2021, dividend payments were certainly back, following the cuts and suspensions that we saw in 2020. I believe according to Dow Jones, total dividends paid by the S&P 500 companies were up nearly $70 billion in 2021 as opposed to the drop of more than $40 billion that we saw in 2020. What's your take on dividend trends for 2022? What do you expect to see?
Dave Sekera: I think, like everything else, the key for 2022, a lot of it's just going to be normalization, whether that's normalization in the markets, whether that's normalization in consumer behavior, normalization as far as our economic outlook. So, again, getting back to dividend payments, specifically, what I'm looking for this year is, there's still a few companies out there that I think need to get back to where they were prepandemic as far as paying out the percentage of typical earnings in dividends. There's still a little bit of that left to come. But really, what I would expect this year is more for dividends to grow in line with earnings.
Harrell: Now, in addition to increasing dollars devoted to dividends last year, we saw a record number of dollars devoted to buybacks, or firms repurchasing their own shares. Do you think that trend will continue, and what are your general thoughts on capital allocation? And is there any possibility that a proposed tax on buybacks, if implemented, would have any effect on capital allocation decisions?
Sekera: It might be easier to answer that second part of your question first. As far as the Build Back Better bill--whether or not it happens in 2022--which contains that language that they may look to have a 1% charge on buybacks, I just talked to our D.C. policy analyst, recently. We think it's probably under a 50% chance that that ends up getting done with midterms coming up here. Now, having said that, even if it does get done, we're not necessarily confident that that 1% clause would end up making it through to the final stages at the end of the day anyway. With enough caveats there, I guess, the quick answer would be: No, I don't think a 1% charge would be enough in order to change a management's view as far as how they want to allocate capital, whether it's for dividend payments, share buybacks, or for other parts of the capital allocation process.
Now, for 2022, let's get back to this normalization theme. First, I expect management, they're always going to look internally. What kind of capital expenditures can we do that we can grow our own company organically? And I think that's what management is always looking for first. Second of all, then they're going to say, "Well, if we don't have great opportunities here internally, what is out there externally?" So, again, getting back to mergers and acquisitions. What our view is for that this year? I think it's going to be pretty robust. Now, I think, management teams first look for smaller bolt-on kind of acquisitions, but I do think that there's still a pretty good demand out there for larger strategic acquisitions for companies to be able to grow their business.
Now, after that, now we get back into what is your typical dividend payout ratio? So I would expect most companies will continue to keep paying that same type of ratio that they paid in the past. From there, when you have excess cash flow, there might still be some companies out there that think they're a little bit overlevered, might use that in order to pay back debt. For the most part, I think most of that excess cash flow is going to go back for share buybacks this year.