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Finance prof sees corporate dividends returning
Gentex announced an increase in its quarterly dividend last week, from 12 cents to 13 cents per share, which a GVSU finance professor interprets as “sending a message that they are confident about the future.”
“Companies won’t increase their dividends if they think in a year or two or three they’ll have to cut them. So this kind of raises the bar in saying, ‘We’re here now and we’re going to stay here,’” said Gregg Dimkoff of the Seidman School of Business.
Indeed, Gentex chairman and CEO Fred Bauer said that “despite the volatile global macroeconomic environment, our board believes that the dividend is important to investors" and “our goal has been to have the dividend rate be meaningful, sustainable, and increase over time at a rate generally in line with the company's net income and operating cash flow."
The Gentex quarterly cash dividend was implemented based on establishment of the Jobs and Growth Tax Relief Reconciliation Act of 2003, which the company said “significantly reduced the federal income tax rate for shareholders who receive corporate cash dividends, making the declaration of a dividend a more tax-efficient means of returning value to shareholders.”
Dimkoff said Gentex stock has “kind of gotten pounded down” in recent weeks, trading last week at $26.50 while it had been over $30 in January and close to that through December. He said that, in his opinion, the drop in price was due to a minor “slip” in Gentex earnings and other factors, which he views as “just normal ups and downs of life.” He said he sees Gentex stock as a great investment at its current price.
The dividend increase last week, he said, is “another salvo” from Gentex that is saying, “‘Life is good, you dummies,’” said Dimkoff.
During the recession, he said, many companies either eliminated or cut their dividends, “or didn’t raise them like they normally would. Now that business is starting to recover, we are seeing the dividends returning.”
Banks and utilities used to be the stocks for people who wanted dividend income, said Dimkoff, but both have gone through some tough times of late.
Consumers Energy’s stock price and dividend reflects the difficulties experienced by utilities, according to Dimkoff, noting that CE “just about eliminated its dividend” twice in the past 25 years. One of those eras began after CE (then called Consumers Power) almost went bankrupt when it had to abandon construction of a nuclear plant in Midland in the early 1980s. The other era followed the Enron scandal, which had an adverse effect on Wall Street in general.
CMS Energy stock was more than $31 in April 2001, then began dropping to less than $4 in March 2003. It began a painfully-slow return for several years, finally reaching $22 a share in December. Its dividend in May 2002 was 36 cents, then dropped to 18 cents that November. After that, it vanished altogether for almost five years, returning in early 2007 at 5 cents. In November 2010, it went from 15 to 20 cents and is now at 24 cents.
Banks, of course, took a brutal pounding in the Great Recession, with many failures, and many survivors forced by the federal government to stop their dividend payments in return for accepting emergency bailout loans.
Dimkoff said Community Shores Bank and Independent Bank are still in severe difficulties. “They will probably survive, but they don’t have the cash to pay the dividend,” he said.
Mercantile Bank must repay $21 million in government loans before it can pay a dividend, he added. “I would expect that to happen this year, though. It would surprise me if it doesn’t, and it would also surprise me if Mercantile doesn’t immediately start paying some small dividend, just to send the message” that it is on the road to recovery, he said.
“Mercantile has returned to profitability and I know one of their top priorities is repaying that money” to the government’s TARP program, said Dimkoff.
“The big banks have pretty much repaid the TARP money but still not to the point where they are paying anywhere near the dividends — if any — that they were paying. I think we have that to look forward to over the next few years,” he added.
Dimkoff is a professor of finance and director of the certificate program in financial planning at GVSU, where he was hired in 1975 to form the finance department. He has more than 39 years of teaching experience at both Michigan State and GVSU, in business finance, personal finance, insurance and economics. He holds a Ph.D. in finance and a B.S. in chemical engineering from MSU, an MBA from Saint Louis University, a Chartered Life Underwriter degree from the American College, and is a certified financial planner. At GVSU, Dimkoff has held the positions of both assistant dean and associate dean of the Seidman School of Business and chairman of the finance department.
He was the first recipient of the GVSU Outstanding Teaching Award and the 1998 recipient of the School of Business Alumni Association’s award as an outstanding business faculty member. The GVSU Alumni Association named him as the 2003 Outstanding Educator, and was selected by the students and alumni as the 2007 recipient of the Seidman College of Business Service Award.
Dimkoff has written more than 200 articles and five books, the most recent being “Modern Risk Management and Insurance.”