The Federal Reserve national flow of funds accounts (Tables F102 and L102) show that current yields for cash dividends on U.S. corporate equities fell significantly in 2005.

The current yield for the entire market is calculated by comparing the Federal Reserve’s figure for total market value of corporate equities to total disbursements on cash dividends.

The graph shows that the downtrend in dividend yields was constant throughout 2005.

	Dividend Yield on US Stocks

Between Q4 2004 and Q4 2005, average dividend yields fell from 4.2% to 1.5%, while long bond rates held steady or rose slightly.

The decline in dividend yield was due primarily to a sharp reduction in amounts paid as dividends, rather than to an increase in the market value of equities.

In 2004, the U.S. Congress passed the “American Jobs Creation Act” which allowed a U.S. company to elect, for one taxable year, an 85% dividends-received deduction with respect to qualifying cash dividends from its foreign subsidiaries, when such dividends were in excess of a base period amount and were reinvested in the U.S. pursuant to a ‘domestic reinvestment plan’.

Of course, Congressmen and women cannot be expected to understand that money is fungible and that there is no way to prove that a ‘domestic reinvestment plan’ was anything more than normal corporate investment that would have occurred without a tax incentive.

However, the Federal Reserve national flow of funds accounts (Table 102) indicate that in 2005 there was indeed a massive repatriation of U.S. corporate earnings held overseas, as this graph shows:

	US Profits Retained Abroad

Foreign profits retained abroad appear as red bars, while domestic profits are in blue.

In 2005, the red bars for foreign profits held abroad suddenly disappear, while domestic profits zoom upwards.

More »

The Federal Reserve national flow of funds accounts for Q4 2005 confirm a remarkable and disturbing new trend in corporate behavior that seriously undermines the intrinsic value of the U.S. stock market.

Over the last five quarters, the annual rate of dividends paid by U.S. non-financial corporations has fallen by two-thirds, from $462.2 billion to $160.5 billion.

(See flow of funds table F213.)

The apparent reason for this negative trend is the intent of corporate management to radically increase stock buybacks in order to boost the value of executive options.

The discounted cash flow basis for stock valuation, which has been accepted by serious analysts since the 1930s, defines the intrinsic value of equities as a function of the projected rate of growth of cash dividends.

Now we have a situation in which the rate of growth of dividends is negative, and this is not a fluke occurrence in a single quarter, but a real trend that seems likely to continue.

Furthermore, the reduction in dividends has not been to reinvest in the company in the immediate term, with the objective of increasing future dividends.

Rather, the purpose has been solely to divert corporate profits into the pockets of executive managers by manipulating prices upwards in spot markets to give value to stock options.

(See: Essays on Stock Buybacks.)

More »