8 Sweetheart CEOs: More Cash for Shareholders, But…

This article was written with Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with minyanville.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

Investors have lots of love for the business leaders on this list. They’ve accomplished an amazing feat.

If you believe leadership matters, here’s a group of guys to bet on:
• Thomas Linebarger, Cummins Inc. (NYSE:CMI)
• Donald Washkewicz, Parker Hannifin Corp. (NYSE:PH)
• Hugh Grant, Monsanto Co. (NYSE:MON)
• Samual Allen, Deere & Co. (NYSE:DE)
• Douglas Oberhelman, Caterpillar Inc. (NYSE:CAT)
• Rex Tillerson, Exxon Mobil Corp. (NYSE:XOM)
• Robert Iger, Walt Disney (NYSE:DIS)
• Joe Watson, Chevron Corp. (NYSE:CVX)

According to my way of thinking, these chief executives are the top CEOs in the country because they’ve been able to accomplish an amazing feat during a slow to no growth period in the stock market and the US economy. Specifically, they’ve presided over a material increase in the cash they return to shareholders, while materially decreasing the amount of profits that are allocated to dividends.

To put this into perspective, and bring it up (or down) to a level everyone can understand, it’s like this: While many of your friends are unemployed or underemployed, you manage to deliver to your spouse a significant bump in his or her annual allowance, while simultaneously increasing the savings rate of the household at large.

Do that, my friend, and see just what’s waiting for you this Valentine’s Day.

I arrived at this list of CEOs and companies by looking at the dividend payout ratio (DRP) over the last 10 years for all of the stocks in the S&P 500 (INDEXSP:.INX), as well as the index itself. The dividend payout ratio is the percent of earnings of a company allocated to cash dividends. It’s defined as: dividends per share ÷ earnings per share. For you academics out there, the DPR is: cash common dividends ÷ (income before extraordinary items-minority Interest – cash preferred dividend) x 100.

Then I looked at the compound annual growth rate in the dividend for all the stocks in the S&P 500 over the last 10 years.

What I was looking for, specifically, were the companies where the dividend was growing at a healthy rate, while the amount of profits allocated to the dividend was shrinking at a healthy rate. At first brush, here’s what I found:

All of these companies allocated less and less profits to dividends, yet managed to grow their annual dividend at least 5% compounded annually. But I wanted to raise the bar a little higher, so I decided to include only companies and CEOs that were able to reduce the DPR and increase their cash payout in double-digit numbers. Here’s who made that list:

Gentlemen, my hat goes off to you.

By comparison, it’s worth noting how the S&P 500 performed at large with respect to these two performance ratios. Specifically, as the chart below demonstrates, for the S&P 500, over the last 10 years, the payout ratio increased at about 1% annually, while the CAGR in cash dividends for the S&P 500 index was 6.86%.

Regrettably, I fear there are probably more than a few unsung heroes out there. Specifically, among the financial databases my firm subscribes to, we found complete 10-year dividend data on just 133 of the 500 companies that comprise the S&P 500. Companies with incomplete data were left out of my analysis, as they should have been for missing dividend payments. However, some of the missing data, no doubt, stems from mergers, acquisitions, and divestitures, which means that some sweetheart CEOs will have to manage with love unrequited.


Dividend data: divdata.com, Value Line Publishing, LLC.
Payout ratio formula: Bloomberg.
Current dividend yields: Capital IQ.

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