Going forward I expect to see more dividend increases across all sectors, with few decreases, along the line of the second quarter. Investors appear to be coming back to more of a total return mentality, and historically dividends make the difference. I do have some concern if investors start to reward buybacks (SCR - share count reduction), since companies may respond as they did in 2006/7 with more buybacks, impacting cash dividends. I also believe, if the economy continues to improve (slowly), and home and commercial real estate portfolios don't deteriorate, that we could see a second round of Financial dividend increases late in the year, with the increased payment being made in the first quarter of 2012.

For more details see the attached file dividends_20110706.rtf

The debate between buybacks and cash dividends dates back to even before I started at S&P, in 1977. In the time since, I've yet to see any convincing evidence -- academic or practical -- which proves that one is better for companies or shareholders than the other. The difficulty of obtaining proof lies in the inability to isolate the cause and effect over long enough time periods. To say that Exxon-Mobil is the largest company in the world today, because it has reduced its share count for 42 of the last 43 quarters (the only decline was in Q2, 2010 for the XTO merger, when the company was prohibited from doing so due to SEC regulations, but made up for it the following quarter), is as indefensible as saying that the Coca-Cola Company is successful because it has increased its cash dividends for each of the last 49 years (the company has paid cash dividends each year since 1893). The cause and effect are not clear; Exxon's profits are what permit the company to buy back shares, just as Coca-Cola's business model is what permits it to increase dividend payments. Then, there is Berkshire Hathaway and Apple, which employ neither buybacks nor dividends. Over the past year, 354 S&P 500 companies have spent US$ 333 billion on buybacks, while 386 issues have paid US$ 213 billion in the form of common stock dividends: 272 issues did both -- with 161 of those issues spending more on buybacks than dividends, and 111 spending more on dividends. When a company repurchases its own shares, the transaction is called a "buyback." Typically, buybacks are done in an open market operation, but, can also be done in a private environment from a large shareholder, or from corporate executives. In general, companies buy shares back in the open market, and the event is an immediate win-win for all. The buying adds upward pressure to the stock, and even if the stock is deteriorating, the decline should be lessened a bit by to the upward pressure. The buyback immediately reduces the share count, which, theoretically, increases each shareholder's wealth in the company. More importantly it reduces the average share count used to determine earnings per share in that quarter, therefore increasing EPS, and showing a lower multiple. This EPS push is known as Share Count Reduction (SCR). Unlike a cash dividend -- which, once paid, is gone forever -- the shares purchased by the company sit in its treasury. From a company's perspective, it owns the shares, and can reissue them at any point -- subject to certain timing limitations. Reissuing the shares, however, would dilute earnings, so the more common use for the shares is for M&A, when dilution is more acceptable to the market.

The most common use for repurchased shares is to fulfill employee options, thereby, controlling earnings dilution. Options are used to compensate and incentivize employees. The decision to protect earnings from dilution via buybacks is a legitimate management tool. SCR is more controversial, and a more costly form of buybacks. When a company buys a share in the market, say at $50, and then exchanges it for an employee option, with a strike price of $35, it costs the company a net $15. If the company wanted to reduce its share count by one share, it would have to pay the full cost of $50. For this reason, SCR is not a common practice, as companies typically don't hold shares in their treasury indefinitely. That said, the buyback bonanza, which started when buybacks went to US$ 66 billion in the fourth quarter of 2004, from US$ 46 billion in the third quarter of that year, then reached their peak of US$ 172 billion, in the second quarter of 2007, and declined to US$ 24 billion in the second quarter of 2009 was an unusual event. The period (Q4 2004 through Q3 2007) was marked by a strong bull market, as well as the actions of investors who bid up stocks from issues that did buybacks. The "reward" pushed companies to buy more stock -- which was now more expensive -- creating SCR which increased EPS, which in turn added to the upward pressure on stocks. As with all such circles, all was well, as long as all went well. The liquidity and housing bust quickly deflated the buyback bonanza. From there, companies have reentered the buyback arena, with few doing SCR, but most protecting their EPS with sufficient buybacks to prevent dilutions. Currently, through Q1 2011, share counts have been stable to slightly up, with a slight decline if the financial sector is subtracted. While buyback authorizations have increased in size and duration, the actual shares repurchased have been congruent to the issuance, with the major determinant of buybacks being the market price. The higher the price, the more options are in the money, and the more companies will need to spend to protect their EPS. Conversely, a Bear market would remove the value of many options, and reduce the cost of repurchasing what shares the companies do need.

The potential for another buyback bonanza is not unlikely. Companies have an abundance of available cash -- Q1 2011 was the tenth consecutive quarter of record cash for the S&P 500 Old Industrials -- for such operations, with cash-flow at record levels and earnings expected to post an all-time high in the third quarter. What is lacking for increased buybacks --and what I believe is holding companies back, at this point -- is investor reaction. If investors start to bid up stocks which are increasing buybacks, I believe companies will respond with higher levels of actual buybacks, creating SCR, thereby starting the upward cycle again. At this point, there are few signs that investors are reacting in that manner. Last month, two issues drew attention to themselves for their buybacks. Integrated poultry business issue, Tyson Foods (TSN), gained 4.6% as it authorized a large buyback program, after it declined 6.6% two days prior on a poor earnings report; and semiconductor equipment maker, Novellus Systems (NVLS), gained 6.6%, after announcing a debt offering, with the majority of the money being used for buybacks. These are the type of investor reactions (to buybacks) which could push corporations to increase buybacks to the share count reduction level, from the current option-covering buying level.

The underlying question, however, as to whether increased buybacks that create SCR are useful and profitable, remains open. Part of the answer comes from what companies do with the shares. If they reissue the shares through an offering, then the result is measurable - purchased at X, sold at Y. If they use the shares for M&A -- individuals typically prefer shares in a deal, since they tend to be tax deferred -- then the question is: how good is the company management at combining the two companies (products, clients, personal)? In this case, the actual cost of the shares is secondary to the eventual "gains" of the merger. The third choice is for the company to hold the shares -- while they could cancel them, few have chosen historically to do so -- in which case there is no measurable result, since what the company might have done with the cash is never known.

At this point, even as large-cap issues boast strong balance sheets, with good prospects for future earnings growth, they remain nervous about their future, and shy of commitment. If, however, investors start to bid up buyback companies, it would be my belief that companies would respond and short-term stock prices, rightfully or not, would increase.

I've done an initial overview of the data, and a first glance is available. Overall reporting has remained the same - poor at best. Lots of nice pictures, messages from senior management, and few (if any) tabular tables, which are not required under GAAP via the FASB. Investors need to be careful of what data and statistics they use. To illustrate, based on the current (incomplete data), 2010 foreign sales appear to be 24.6% of total sales; however, if I only utilize the companies which report foreign sales, the rate is 41.6%, and if I eliminate some of the stranger values, such as companies reporting foreign sales of over 100% of total sales or reporting no foreign sales even as they have major foreign facilities, the rate is calculating to 47.0%, slightly ahead of the 46.6% rate for 2009 - this adjusted rate is the one S&P uses, although in the report I show them all.

There are some initial observations from the preliminary data developing. Last year S&P 500 companies paid slightly more to the U.S. government in Federal Income taxes than they paid to foreign entities. This year, while U.S. taxes are running 2% higher, foreign income taxes are running 23% higher, resulting in S&P 500 companies paying more in income taxes to foreign countries than they paid to the U.S. government; recall the dialog over the 2010 General Electric tax rate, as well the current discussions on repatriation, and then there are this mornings job numbers. Operating pre-tax income, reported by even fewer issues, and therefore even more suspect, shows that of the reporting companies, that 52.5% of operating pre-tax income is foreign in nature (remember operating has no legal definition, and pre-tax is a cost-accountants nightmare - so another grain of salt for this number). On a sector basis Information Technology has maintained its foreign sales, with 57% booked as foreign, with Financials showing a reduction, from 41% last year to 37% for 2010 (Financial are still difficult, whether it be sales, earnings, book value, on or off balance sheet items,..). Regional data is not yet available - need to clean up the top level first, however, it again appears that the largest declared region is 'Foreign Countries' - not a lot of help. I would like to say that there are current legislative or policy proposals to require reporting, but there are not. And companies do not want to report the actual values. From an investor side, I can think of fewer things I would like more than to be able to create a matrix based on production and sales: parts made in China, assembled in Europe, and sold in the U.K., with profits translated into the U.S. dollar; fill the currency rates (and maybe a currency hedge, if available) and see the net income impact. My editorial is don't count on it. For now, I'm using 47.0% for a holding position for foreign sales, 'over half' for pre-tax operating from abroad, and expecting to see the data on taxes again used in editorials and position papers, from all sides. The tentative release date for the 2010 report is July 14, 2011 - let them eat cake.

OPEB underfunding remains massive and unfunded.
Underfunding slightly reduced to US$ 210 billion from US$ 215 billion in 2009.
US$ 274.1 billion in OPEB obligations, and only US$ 64.5 billion in assets.
Pay-as-you-go OPEB remains a target for cuts, concerns and human casualties.
The responsibility of providing post-retirement medical care is now shifting away from corporate programs to individuals and to U.S. social policy.

For the full S&P 500 Pension and OPEB report, please click here pensions_and opeb_2010_data.doc

Currently, 2011 full year estimates for both bottom-up ($98.06) and top-down ($94.89) estimates predict that 2011 will be a record year (not sure if that's a buy or sell signal), beating the record set in 2006 ($87.72), with both also expecting Q3,'11 to set a quarterly record (bottom-up $25.09, top-down $24.07, with the current record of $24.06 being set in Q2,'07). However, top-down is pointing to a much slower growth rate after that, with next year's earnings growth rate estimated at 6.7%, compared to the bottom-up estimate of 14.0%. Both annual estimates set new records for 2011 ($111.79 for bottom-up and $101.21 for top-down) and show growth, but bottom-up is over 10% higher. The concern I have is that we appear to be focusing on bottom-up only, dismissing the group that has a decent (but nowhere near perfect) record of sending up an early warning signal. The fact that top-down estimates show growth is a positive sign, but the reduced rate of growth suggests that we should reexamine what we are paying for forward growth, least we get ahead of ourselves. If you are a committed long-term holder who will hold the stock regardless, then the difference is a blip on the scope. But for the rest the investing public (a not so silent majority), accepting any forward estimate, which mostly everyone says is going straight up, deserves a watchful eye, and maybe even some set limit orders.

Use link to file and data Everything is beauiyful.doc

For the full year, I expect dividend increases to continue at a brisk pace, but not at the levels of the past four months. If the economy continues to improve (or at least Housing and Commercial Real Estate doesn't dive), I would expect a potential second round (not that we are done with the first one yet) of Financial dividend increases at year-end, with the increased payment being made in Q1 of 2012.

Use link for files, tables, and charts div_20110427.doc

The Cash-Flow records join what is seen as a growing list of all time high characteristics for the S&P 500. Cash and equivalents for the S&P Industrials (Old) set another record at year-end 2010, as did book value, and deferred taxes and investment tax credits. Operating earnings and sales are expected to post new record highs in 2011. Lagging a record high is the price, which currently stands at 15.4% below the 2007 high, and 9.9% less than it was at Y2K (of course with dividends reinvested the index is up 10.7%). Given the bottom-up projected record high earnings and sales, price becomes the product of accepted multiples, which speaks to the believability and sustainability of earnings.

The record cash flow helps account for the record cash, and reinforces that big-cap companies are choosing not to spend, as compared to not being able to spend. And when combined with low interest rates, enhances the price-to-discounted cash flow, making M&A more attractive. So, the question remains - when will big-caps spend. Over the next three weeks we should know if the new depreciation schedule helped (of course, if you don't pay taxes the write-off is meaningless). Specifically we need to review not just the sales value, but the backorders. However, it is more jobs that we need, and that means more production, and there are no credits which will inspire companies to build more products unless it believes it will sell more products. For that to happen, companies need to believe. Believe in the process, believe in the economy, believe in the fairness, and believe in the future. I'm not sure about big-caps, but for me, last week's DC demonstration of 'coming together' didn't do it.

S&P 500 2010 Statistics:
The percentage change uses the average of the four quarters to determine an annual level; all data is on an index weighted basis, with historical membership and weights.

Total assets increased 2.78%
Long term debt declined 0.86%
Shareholders equity increased 10.67%
Book value increased 13.89%, to a new record

Sales increased 5.98%
Cost of goods sold increased 3.22%
Interest expense was 6.96% lower, and 35.43% less than the 2007 high
Depreciation was flat
Capital expenditures increased 6.46%, with Q4,'10 posting a 20.14% increase
Buybacks increased 111%, but remain 50.5% off their 2007 peak
Deferred taxes and investment tax credits increased 12.27%, and has also set a record

Inventories fell 2.53%, the third year in a row, and are now 39.25% below the 2007 high
Receivables declined 1.43%, the third yearly decline
Property, plant and equipment value increased 2.96%

See file for charts and data Sale On.doc

So far this year, six breakups within the S&P 500 have been announced, which, when combined with the one executed, and the one scheduled from last year, puts the 2011 spin-off count higher than the historical average of less than seven a year, and it's still Q1. These spinoffs were not a spur-of-the-moment item, nor were Mr. Buffett's acquisition, or the Ma Bell buildup, or eBay's bid. They have been talked about, studied, and planned for years, with the only open decision being "when, and for how much." Given the events in Japan and in the Middle East, the" when" may not be today for many, but soon, and, when it comes, it will be big. All that built-up planning, combined with significant cash and common shares sitting in treasury accounts from the buyback bonanza, and the desire to grow quickly, translates into M&A activity.

So how long can companies sit on their massive assets, nervous about the market? Not that they aren't justified in being nervous, but they can't keep building cash reserves, content with past cost-cutting to support future growth. All those companies, with all that money, all coming from the same B school, all using the same charts, and all deciding to spend it at the same time - do I need to be a supply-sider to know what that will do initially to stock prices. This is America, and for Corporate America, its build it or leave it. Can Monday Morning Merger Mania be far off?

Indicated dividend rate up 7.0% from year-end, that's a 7% rise in your annual pay 15.0% over last year, but still 12.9% lower than the Jun,'08 high

Expect we won't return to 2008 high until early 2013 for the S&P 500, and later in 2013 for the rest of the U.S. domestic market

10 initiations - it's a movement

Expect 15% actual Mar,'11 payment increase over Mar,'10, with quarter at +13%+$16.2B Q1-to-date dividend rate increase vs. +$5.1B for Q1,'10 vs. decrease of $38.7B for Q1,'09 (see attached chart)

Financials back in the game, but its going to be a long game

5 fundamental reasons I am positive on dividends Corporate earnings have significantly rebounded from their recession levels, and are now approaching record levels
Low interest rates
Corporate cash on hand stands at an all time high
Payouts remain low, partly due to the speed of earnings improvement and the slower rate of dividend increases
Coverage rates, earnings divided by dividends are very high

The attached reports give the details, along with charts, tables, and some issue level for where we have been. To see the report click here Buybacks_20110323.doc

For the first quarter of 2011 (no reporting yet), I believe companies continued to be cautious and, in general, purchased more shares than needed for options, enhancing Q1 EPS.
For the remainder of 2011, subject to market conditions (no major crisis), it appears investors are once again (slightly) positive on buybacks, with companies willing to use their vast cash reserves to support stock prices and push EPS up.

If investors get on board the buyback wagon, meaning they buy issues of companies that increase buybacks and do SCR, and bid them up based on their higher EPS, then companies will increase their programs and we may well be in for round two of the buyback bonanza.
However, if strong investor reaction does not materialize, I believe companies will continue to protect their earnings, as well as to purchase small amounts of additional shares, helping their earnings per share to grow - under the radar scope of the headline news.

There had been a significant discussion about special dividends last year, which did not materialize for big-cap issues, as well as maximizing shareholder return - to which there has been an increase in announced buyback programs (we will need to wait and see if the authorization turns into market execution). Earlier this year, Motorola Corp separated itself into two companies by distributing stock of Motorola Mobility Holding (MMI; S&P added it the S&P 500), and then changed its name to Motorola Solutions, Inc (MSI; it remained in the S&P 500). Public awareness and speculation on spin-offs is growing.

Doing some research, it appears that over the past 25 years the S&P 500 has accounted for 20% of the U.S. spin-off distributions, with the statistical likelihood of an S&P 500 issue doing a spin-off being 203% higher than a non-S&P 500 issue. Given the average size of an S&P 500, the statistic also speaks to their ability to divest; the wiliness is another issue. Building down is not exactly an American tradition. Currently, however, it would appear that the idea has gained some ground. The idea of business concentrating on one thing, and doing it well, as compared to the old Gulf and Devourer is nice for smaller companies, but will large-caps (or their egos) be satisfied? Isn't bigger better? This is America - we have no limits (unless there is another liquidity crunch). But as we are all leanings, having a credit line doesn't mean you should use it; maybe good business is making good product, and making good product is a full time job, which require full time attention to a single product line.

Below is the recent gang of five:
ITT Corp (ITT) plans to split into three companies, concentrating on: defense and information, industrial business, and water technology
Marathon Oil (MRO) plans to spin-off its refinery operations; the new company will be called Marathon Petroleum Corp and will trade under (MPC)
Marriott International (MAR) plans to spin-off its timeshare business, focusing on its hotel business line
Sara Lee Corp (SLE) plans to split itself into two companies, one concentrating on U.S. domestic operations, and the other on non-U.S. international operations
Williams Companies (WMB) plans to divest its independent exploration and production company via a partial IPO in the third quarter of 2011, then to spin-off the remainder to shareholders in 2012

Also on the table, from last year, Sunoco (SUN) plans to distribute Suncoke Energy (metallurgical coke) to its holders, concentrating on refining, supply, and its retail marketing business

EARNINGS:
Q4 EPS show a 29.5% gain over Q4,'09, but just a 2.5% gain over Q3,'10
Q1,'11 is expected to be flat with Q4,'10; so given the 'usual' beat, slightly up
FY 2010 earnings are 47.6% higher than 2009, and are on par with 2007
2011 is expected to surpass the record earnings year of 2006, with a 14.6% gain over 2010 (9.6% above the record 2006 level)
Forward price-to-earnings ratios remain historically low, 13.8 for estimated 2011 S&P 500; 15.0 for preliminary 2010
EPS on par with 2007, applying 2007 P/E the S&P would be 1493, 12.3% higher than the current 1329

SALES
2011 sales estimates have been increasing over the past three weeks, with 2011 estimated to post a 12.1% gain 2010
Margins to remain high
Eventually, when sales outpace production, more corporate investment (and workers) will be needed which will reduce margins
That will be a good sign - more spending, more working, upward cycle (but inflationary)
Current sales continue to grow, but very slowly

CASH HELD BY S&P INDUSTRIALS:
Cash has set 8 consecutive quarters of record cash levels: Q4,'08 - Q3,'10
Q4,'10 is coming in 3.6% ahead of Q3,'10, implying a new record
The implied level would be 9.3% of market value and 68 weeks of estimated 2011
Materials and Consumer Discretionary increases are a double-digit gain over Q3,'10
Notable increases are Dow Chemical +$3.8B (Q4 is $6.9B, Q3 was $$3.1B); Gilead Sciences +$3.0B ($5.3B, $2.3B); Amazon.com +$2.9B ($8.8B, $5.9B). Decreases include AT&T -$1.8B ($1.4B, $3.2B), Cardinal Health -$1.3B ($1.3B, $2.7B), Archer Daniels Midland -$0.8B ($0.5B, $1.4B)

BUYBACKS (less than half the issues reported):
Buybacks are coming in 49% ahead of Q4,'09, but only 1% above Q3,'10
So far Microsoft (again) is spending the most on buybacks, $5.05B, up from $4.40B in Q3,'10; Coca-Cola is next, $2.96B up from $1.0B, with Cisco at $1.85B up from $2.7B. Procter & Gamble decreased to $0.52B from $3.01B in Q3
Companies continue to protect against earnings dilution, with some Share Count Reduction (SCR) in the quarter, but more 'inching up' over the year

SHARE COUNT (less than half the issues reported):
Initial share count has gone down 0.9%, with the year-over-year count down 1.6%.
Health Care count is 5.0% less than it was in Q4,'09; Financial shares are down, but need more data to interpret
Companies continue to cover options, with a slow move back to share count reduction
Announcements and program increases have escalated
Share Count Reduction Returns: Fidelity National decreased its shares 18% from Q4,'09, as Travelers, Biogenic Idec and WellPoint reduced their count 15.0%, with AutoZone down 10%, and both Visa and Quest Diagnostics down 8%; EPS impact starts, more coming in Q1,'11

CAPITAL EXPENDITURES (less than half the issues reported):
Q,'10 is showing a 9.2% gain over Q4,'09, and a 17.2% gain over Q3,'10
Expect companies will be spending more on replacement equipment and delayed maintenance, aided by full write-off schedule which ends 12/2011

DIVIDENDS - Q1,'11:
Dividend increases are very strong, with the average increase being 22.65% and the median being 12.20%
Dollar weighted increases are up 35% YTD compared the full first two months of 2010, with the increase estimated to be 100% by month end
Indicated rate continues to increase, but a full recovery is not expected to 2013
Five fundamental reasons adding to dividend growth:
Corporate earnings have significantly rebounded from their recession levels, and are now approaching record levels
Low interest rates
Corporate cash on hand stands at an all time high
Payouts remain low, partly due to the speed of earnings improvement and the slower rate of dividend increases
Coverage rates, earnings divided by dividends are very high

MARKET COMMENRTARY:
The market continues to move up, with the S&P 500 on its way to doubling its price since the index's March 2009 low, 23 months ago. The index is now up 96.5%, and is looking to reclaim its October 2007 high, which it needs another 17.8% to match.

Investors continued to focus on the positive U.S. domestic market and fundamentals and this week discounted the Egyptian situation, another Chinese interest rate increase, and higher global food prices.

The U.S. market support is based on three items. First, earnings are coming in at a steady, strong pace, matching the pre-recessionary levels; second, most company guidance for 2011, which has come out over the past three weeks, is more upbeat and positive, which gives support to the estimation that second half earnings for 2011 will set an all-time record; and third, the economy is continuing to improve, with some progress on the employment issue.

Investors remained optimistic, but many now expect some consolidation due to the 26.9% run-up from the index's recent low in August 2010. Therefore, a small consolidation should not upset investors. However, if selling programs or profit taking take hold during that sell-off, things could escalate quickly, which could test investors' outlook.

Next week will bring Washington, and its politics, back to Wall Street. President Obama will release his budget for fiscal 2012 (which starts October 2011) Monday night, along with his specific areas in which he wishes to spend and cut. Congressional opposition leaders have already outlined their views (mostly cuts) to which discussions will fully start once the President presents his budget. Adding to the fun budget is the fact that the current budget was never finalized, with the government currently spending on an extended resolution which expires March 4th. Initially, the emphasis will be on completing the 2011 budget, with the 2012 budget taking much longer to work its way through the process.

While I expect the general economy to continue to improve, I also believe that corporate planning and strategy will play a greater role, which could result in a more volatile market as issues are rewarded or punished for their effects.

Finally, I think this twitter note hits home ( www.twitter.com/hsilverb )
Pensions are the iceberg, but OPEB (Other Post-Employment Benefits, such as medical) is the fact that there aren't enough lifeboats

For the full report, including tables and charts, click here
A few Q4 preliminary stats.doc

I expect the increases to continue strong throughout the month, beating the $4.9 billion set in 2007, and marking a return to 'normal' dividend actions
There are five fundamental reasons that lead me to this projection:
Corporate earnings have significantly rebounded from their recession levels, and are now approaching record levels
Low interest rates
Corporate cash on hand stands at an all time high
Payouts remain low, partly due to the speed of earnings improvement and the slower rate of dividend increases
Coverage rates, earnings divided by dividends are very high

Financials which have been increasing (I found 46 this morning which have increased at least 10 years in a row) should continue, with big name Financials expected later in the year - but don't expect to get back to where we were to soon
Most Financial issues are still recovering
Portfolios, off-balance sheet items, housing, commercial real estate
Share counts are much higher
Fed - I'll Be Watching You

See attached file for data, tables, charts and issues
dividends_return_to_normal.doc