TIP Guy at TIPBlog.in presented his thoughts on how dividends are perceived at least in India’s corporate world. I am reproducing certain snippets (with author’s permission).

The lack of consistent dividend growth companies in emerging markets can be interpreted in different ways

1. Emerging economies need very dollar to invest back in their businesses. The cost of external capital is typically higher, and hence it is advisable to use internal resources. Shareholders can get their return by capital appreciation on their share values.
2. The managements are not mature enough to understand the importance of common shareholders, or sharing a piece of profits with shareholders, and/or prudent cash management over longer term.
3. The taxation policies which do not favor dividend distributions.

I believe most of the corporations in emerging markets are personality driven, and lack any institutional management philosophy. The corporations are primarily driven by personal aspirations (both, good and bad), and as a result the shareholders have miniscule holdings (and contributions). I cannot recall any instance where majority shareholders (other than family and friends) or banking institutions that have been able to make any change. And hence, this has a part in driving the dividend strategies. Common shareholders have such a small percentage holdings that they always remain in back burner.

There are approximately 400 companies in India that have at least paid dividends for last 10 years. However, they have not been growing consistently. Furthermore, the dividend strategies also hinge upon governments taxation policy and cost of available capital. I believe as that as Indian economy grows and competition increases, the cost of capital will come down, and taxation policy will evolve slowly towards friendlier dividends. As of today, at least the dividends are tax free for individuals.

Certainly, there are issues about Indian corporate’s dividend friendliness. However, there are 400 companies that still pay dividends. If we look back 30 or 40 years, I tend to believe that’s how US companies and corporate may have viewed the dividends. As US economy matured, few selected companies continued to follow their strategy resulting in Aristocrats’ and Achievers. While I tend to agree that, over time, Indian corporate may evolve towards dividend friendliness, I do not think it is at a point where they can be attractive on its own. There is promise, but not yet.

Until then I believe using US-based multinationals that generate revenue from emerging markets are best proxy for investing in emerging markets. Some examples are:

• QCOM (my analysis)
• BDK (my analysis)
• CBY (my analysis)
• INTC (my analysis)
• ADM (my analysis)
• PG
• UL/UN
• Nestle

What investment vehicles do you use for investing in emerging markets?

History shows that it is normal for corporations to change (increase, decrease, or suspend) the dividends paid to the common share holders. These changes take place irrespective of which stage of economic cycle we are in. In last one year, i.e. between March 2008 and February 2009, within S&P500 index, there were 205 corporations that increased their dividends, 63, have decreased their dividends, and 25 have suspended their dividends. I could be argued that all 205 may not have good quality sustainable dividends. However, this list is deep enough for mining potential gems. In general, a typically dividend growth investor will look for a corporation that has increase its dividend consistently for at least last 10 years. It is always good to wait for 10 years worth of dividend history. However, I would like to evaluate corporations that have started showing signs of dividend growth early on, and see how it stands in my analysis.

In this context, I have shortlisted nine corporations (from S&P500) that for the last five years have (1) consistently increased their dividends; and/or (2) demonstrated their inclination to consistently pay dividends. The attached table shows the dividends for last 5 years and corresponding growth in last five years. Note: Year 2003 growth is with respect to Year 2002.

S&P500 Potential Dividend Growth Opportunities

Waste Management, Inc. (WMI): It provides integrated waste management services in North America. The company offers collection, transfer, recycling, disposal, and waste-to-energy services.

• Pros: Stable cash flow, dominant market share, per management no planned large capital expenditure in near future, more than 100 year old corporation, stable industry
• Cons: lack of revenue growth

T. Rowe Price Group, Inc. (TROW): It is a publicly owned corporation, a holding group, and an investment manager. The firm provides its services to corporations, corporate, public, and Taft-Hartley retirement plans, foundations, and endowments.

• Pros: Debt free, likely beneficiary of baby boomer driven demographic shift, no direct impact from current financial turmoil, only an investment manager, stable industry
• Cons: recession driven slowing down

Analog Devices, Inc. (ADI): It engages in the design, manufacture, and marketing of analog, mixed-signal, and digital signal processing integrated circuits (i.e primarily high performance analog chips) used in industrial, communication, computer, and consumer applications.

• Pros: dominant market share in key product segments, products sell that 55%+ gross margin, debt free, positive cash flow
• Cons: lack of revenue growth, cyclic industry

Linear Technology Corp. (LLTC): It designs, manufactures, and markets various linear integrated circuits (i.e. high performance analog chips, linear products)

• Pros: dominant market share in key product segments, products sell that 65%+ gross margin, positive cash flow
• Cons: lack of revenue growth, cyclic industry

Qualcomm (QCOM): It manufactures and markets digital wireless telecommunications products and services based on its code division multiple access (CDMA) technology and other wireless communication technologies.

• Pros: Ownership of CDMA technology, high royalty revenue (approx. USD 1 billion), all competitor in its market segment operating at loss, technological leadership in communication market,
• Cons: cyclic industry, engaged in too many legal battles,

Intel Corporation (INTC): It designs, manufactures, and sells integrated circuits for computing and communications industries worldwide. It is the manufacture of microprocessor products used in desktops, nettops, workstations, servers, embedded products, communications products, notebooks, netbooks, mobile Internet devices, and consumer electronics.

• Pros: lone player, no long-term viable competitor, technological leadership
• Cons: cyclic industry, history of squandering cash flow in acquisitions,

CME Group Inc. (CME): It operates two self-regulatory futures exchanges viz. CME and CBOT. The company offers an array of products available across various asset classes, including futures and options on futures based on interest rates, equity indexes, foreign exchange, agricultural commodities, and alternative investments, such as weather and real estate.

• Pros: futures exchange,
• Cons: recession driven slow down in volume

Campbell Soup Company (CPB): This firm together with its subsidiaries engages in the manufacture and marketing of branded convenience food products worldwide. It operates in four segments: U.S. Soup, Sauces, and Beverages; Baking and Snacking; International Soup, Sauces, and Beverages; and North America food service.

• Pros: staples industry, distribution network advantage during recession.
• Cons: prolonged recession affecting revenue, shift to non-branded products, slow dividend growth

Becton, Dickinson and Company (BDX): It is a medical technology company that develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products worldwide.

• · Pros: likely beneficiary of baby boomer driven demographic shift, signs of dividend friendliness,
• · Cons: low dividend yield

These are nine corporations that provide a good starting point for additional research. Some the key areas that need further analysis are factors such as cash flow, income, debt level, growth in earnings, and future growth potential. In addition, one another aspect that would need close attention is to understand management’s policy or philosophy vis-à-vis dividends for common share holders. I would like to invest in at least two corporations which have low-to-moderate risk to dividends. I will provide updates as I move forward with the research.