Past can help predict future

Donald Saltz

November 22, 1991|By Donald Saltz

On Tuesday, McCormick & Co. of Hunt Valley announced a 2-for-1 stock split and an increase in the cash dividend, the exact amount to be determined when the firm's board of directors meets on Dec. 16. These actions fulfill predictions made in this column several months ago.

Was considerable expertise involved in determining what McCormick would probably do? Not really. It's simply a study of what the company has done in the past. In this case, McCormick has a tendency to split its shares when the stock's price is in the lower 40s, as it has been for most of the time in recent months. Additionally, McCormick splits have occurred within weeks after the end of the fiscal year, which ends Nov. 30. Also, year-end is the traditional time to boost the dividend, although McCormick has been doing that twice a year. And, of course, earnings have been strong.

The same can be said for Bethesda-based Washington Real Estate Investment Trust, a very successful firm that has a decades-long record of dividend increases at least once a year. In recent years, the boost has been 8 cents a share annually, equal to about 1 1/2 points for the share price, now at 22. A regular increase is anticipated but still contributes to a higher share price.

A dividend increase that came as a surprise to many investors was the one earlier this year by Mercantile Bankshares of Baltimore, simply because so many banks have done so poorly and times remain difficult for banking in general. However, those who keep an eye on what has occurred in the past would have expected this year's increase. Mercantile, an annual booster, raised its latest payout rate from 80 cents to 86 cents a share. That had a positive impact on a bank that was going contrary to much of the industry. The shares are trading at 23 3/4 .

Retailers are also going through a rough period because of the recession, but May Department Stores, parent of Hecht's, Lord & Taylor and others, is doing quite well. May, which is trading in the low 50s, raised its dividend this year as it has done regularly in the past, not a surprise to those who have watched May's operations and noted the continued strong earnings. A dividend increase is usually worth a gain in a stock's price over a period of time even though the yield is modest, as is McCormick's. The stock may not go up right away if there has been a widespread expectation of the increase or the stock market in general is especially weak, but eventually the price may work its way up.

Some companies have a tradition of raising their dividend regularly but there is less certainly during the current period. Giant Food, for example, about 21, has much lower earnings due to stepped-up competition in some of its trading areas, and it may curtail a usual dividend increase. The same is true for the Marriott Corp. of Bethesda, hit by the recession affecting the hotel business and real estate and by heavy interest costs. The stock is below 16. Anyone who studies the past must also consider the present condition of the company in this business climate when attempting to predict what will happen to the dividend.

The student of utilities knows that most of them raise their dividends regularly, but in recent years the increases often have been quite modest. With utility companies' earnings under pressure, the failure to increase a dividend will probably not affect the share price, which in this industry is tied into the current level of interest rates.

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