Markets & Finance

Caution Flags


By Joseph Lisanti Judging by recent developments, some companies appear to be getting a bit cautious about their cash. The September quarter saw no year-over-year advance in the number of dividend increases, but a substantially higher number of dividend omissions.

Last month alone, there were 11 omissions among the 7,000 companies that report their dividend activities to Standard & Poor's. While 11 payments eliminated from such a large universe of companies might not seem like much, only one dividend was omitted in September 2004 and just two disappeared in September, 2003. In fact, you have to go back to April, 2002, when the economy was much weaker, to find 11 omissions.

It's much too early to say that recent dividend activity is ominous. Some companies may be husbanding cash because they are planning to increase capital spending or share buybacks. Other uses for cash could explain the lack of increases reported for the quarter.

More worrisome to us is the higher level of omissions. Once companies institute a dividend, we believe they try very hard to maintain it. Even though dividends are not an obligation of the corporation, most boards seem to act as if there were an implicit agreement to continue paying. So the omission of a dividend implies to many shareholders that the company's financial condition has deteriorated.

Speaking of deterioration, the technical condition of the market appears to have weakened, as the S&P 500 fell below the 1200 support level. According to Mark Arbeter, Standard & Poor's chief technical analyst, that completes a bearish "double top" reversal formation. Arbeter now sees the "500" testing further support at about 1155. He also notes recent weakness in energy and homebuilding stocks, two of the groups that have led the market higher over the past year.

October often sees reversals to the upside, and we still expect the market to finish 2005 higher. But our optimism is of the cautious variety. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook


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