This is an audio transcript of the Unhedged podcast episode: ‘Are dividends back?

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Ethan Wu
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 Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu here in New York, joined from London by markets columnist Katie Martin, who has recently been holed up reading books about the history of dividends.

Katie Martin
Well, yeah, but at least I’m not holed up in the snow like you are, trapped in your home.

Ethan Wu
I’ve made peace with the fact that, you know, today in New York, it’s a snowstorm. I’m not going outside. Who needs to do that? Inside for me all day.

Katie Martin
OK, I respect that.

Ethan Wu
But I don’t think I’m gonna be nearly as productive today as you have been recently, Katie, poring through tomes on the history of dividends, financial markets. I mean, what exciting stuff.

Katie Martin
(Laughter) This is how I roll, Ethan. I’m a very cool person. But yeah, I was reading a book about dividends, the decline of forward dividends and how and whether they might come back by a chap called Daniel Peris, who’s an investor at Federated Hermes. His book is called The Ownership Dividend. That might sound like a slightly dry topic, but it’s actually quite good fun. And I would . . . 

Anyway, there I was, you know, thinking about dividends and what do you know? Meta pops up and says, OK, shareholders, we’re gonna 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 per cent 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 whizz bang, look at us, we do exciting things in the metaverse company like Meta is actually pretty substantial.

Ethan Wu
Yeah. 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 . . . 

Katie Martin
Even before I was born, Ethan.

Ethan Wu
 . . . in financial markets 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 gonna 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?

Katie Martin
No. I mean, dividends have had a bit of a bad time over the past couple of decades. Like if you cast your mind back to even before ancient people such as myself were born to like a hundred 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 per cent, 5 per cent.

You 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, gonna, you know, spend it on whatever I want. Or you could like, plough 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 per cent to under kind of 2 per cent for most of the past couple of decades, other markets actually are much more dividend-friendly. So Italy, for example, the dividend yield is more like 4 per cent. And so there are big like 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.

Ethan Wu
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, using 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 per cent of your total return came from just collecting those dividends and ploughing them right back into stocks.

And, you know, it’s because of the same reason that any investments go up, you know, 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 per cent 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 per cent of total returns to just 17 per cent of total returns. So just a much less significant portion of what a buy-and-hold investor makes holding US stocks these days.

Katie Martin
Yeah. And so, you know, particularly kind of high-growth US 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 gonna 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 of 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 gonna make damn sure they go up. And that’s just different. That is a different kind of mindset for investors to be in. It is the idea that either I’m making a winning bet, this is a company that’s gonna grow fast and I’m gonna be part of it, or I’m gonna buy shares in this company and I’m gonna find a bigger idiot to buy them off me another day in the future and that’s how I’m gonna make my money off it.

And so to the mind of people like Daniel Peris, who wrote The Ownership Dividend, that’s like a casino. That’s like not terribly different from just buying crypto or buying gold or just buying any other non-yielding asset. It’s all just relying on the greater fool theory.

This reintroduction of dividends that we’re seeing and, you know, again, Meta dividends are small and much, much smaller than their buybacks. But it does just say OK, we want to have a different type of relationship with our shareholders. It’s a long-term relationship and I’m gonna give you the signal that come hell or high water, I’m gonna pay you X amount of money every quarter.

Ethan Wu
Yeah. It is odd, I think we have to say that, you know, 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 per cent year over year, operating profits of 46 per cent year over year. I mean, that does not seem to me like a staid, mature company that’s just, you know, trying to reward the long-term faithful in its, you know, corporate story. This is still kind of a growth company. It’s just pivoted towards being a little bit more shareholder-friendly.

And, I mean, you definitely can’t divorce that from the stuff that’s happening to Meta specifically, right? It had this period where the stock was down as much as 70 per cent at some point because investors hated, hated, hated what Zuckerberg was doing with the metaverse. They thought he was pivoting away from the company’s core competencies. You know, burning all this money on this, you know, far away 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, you know, fast-growing and new, as Meta is moving towards dividends — and we are in an era of higher rates, so reversing one of the factors that helped push dividends down the past, you know, several decades — is there possibly a new regime for dividends starting to take hold? And, you know, you’re seeing these predictions or, you know, even these proclamations in the financial press. There’s a piece in The Economist just last week saying very confidently, dividends are back.

Katie Martin
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, 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 sorts of step.

But 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, er, lads, we’re in a bit of trouble here. Like either Covid has hit, you know, which is a perfectly reasonable reason to can 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 and 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 in stock markets and which companies don’t. And it’s not just all about vibes.

Ethan Wu
Well, Katie, the vibes in the past, you know, decade or so have been a lot less about steadiness and a lot more about whee, to the moon! And, you know, 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, why did you cut the dividends? Buybacks are a much more flexible way for companies to give cash back to shareholders. They’re not penalised 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. Investors have come to expect it.

You combine that with the, you know, 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 that year or not, whereas dividends are taxed whenever you receive them. Between those two things, I mean, you can tell, you know, a decent story about why dividends have fallen off and why the sort of steady payments of investors of a generation ago were used to have, you know, 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. And 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 per cent. Contrasting that to the 10 per cent dividend growth we got in 2022. So dividend growth has actually been slowing a little bit.

And you know, Howard Silverblatt, who’s a great dividend analyst at S&P, made the point to me that it kind of just reflects general corporate caution, right? We were talking about recession for sure, 100 per cent, six months ago. And now it’s soft landing, woo hoo. But what’s it gonna be in six months? And again, 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 wanna 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 type of thing.

Katie Martin
Yeah, but I’ll 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. So, 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.

Ethan Wu
Yeah. I mean, it sounds very much like the way the future is just the way of the past.

Katie Martin
Back to the future, man. It’s like old school is the good school.

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Ethan Wu
All right, Katie, we’ll be back in just a moment with Long/Short.

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Welcome 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 microtrends, OK. 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 microtrend called orange peel theory, where if you wanna 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. And these type of mini social media phenomena 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.

Katie Martin
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-Englishwoman look, (Ethan laughs) 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 microtrend, I’ll be really upset. So look, I will be long two things: I will be long of the frazzled-Englishwoman 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 . . .

Ethan Wu
Oh, God.

Katie Martin
 . . . do yourself a favour and read it. It is proper funny. No notes. It is so unintentionally funny. Bits that kind of stick out to 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. He said, and he’s leapt to the defence of his wife who has been accused of plagiarism of 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. And the wife comes back in 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 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.

Ethan Wu
Kudos, Bill. Well done. Well done.

Katie Martin
I just, 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.

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Ethan Wu
Please read that magazine story, if you haven’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.

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Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta 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/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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