Are dividends back?

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Ethan Wu (0:34)

Pushkin.

The social media giant Meta, maybe you've heard of it, recently announced for the first time in its corporate history, a dividend, a little payment to shareholders. And even though it was small, it riled imaginations on Wall Street and got people thinking about, what does it mean that a massive tech company, which was supposed to be in a growth phase, is now doing something more characteristic of bigger, older companies? Today in the show, we ask, are dividends back? This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu, here in New York, joined from London by Markets columnist Katie Martin, who has recently been holed up reading books about the history of dividends.

Katie Martin (1:22)

Well, yeah, but at least I'm not holed up in the snow, like you are, trapped in your home.

Ethan Wu (1:27)

I've made peace with the fact that, you know, today in New York, there's a snowstorm. I'm not going outside. Who needs to do that inside for me all day.

Katie Martin (1:33)

Okay, I respect that.

Ethan Wu (1:35)

But I don't think I'm going to be nearly as productive today as you have been recently, Katie, pouring through tomes on the history of dividends, financial markets. I mean, what exciting stuff.

Katie Martin (1:46)

This is how I roll, Ethan. I'm a very cool person. But yeah, I was reading a book about dividends, the decline and fall of dividends and how and whether they might come back by a chap called Daniel Perris, who's an investor at Federated Hermes.

His book is called The Ownership Dividend. That might sound like a slightly dry topic, but it's actually quite good fun. And anyway, there I was, thinking about dividends. And what do you know? Meta pops up and says, okay, shareholders, we're going to pay you 50 cents a share per quarter in our very first dividend. Now, do not spend this all in the one shop, Meta shareholders. This is not a large amount of money. This is going to equate to a dividend yield of a mighty 0.42% a year.

So the amounts of money that we're talking about here for most shareholders are like fairly trivial, but the signal that this sends from a big whiz bang, look at us, we do exciting things in the metaverse company like Meta is actually pretty substantial.

Ethan Wu (2:46)

Yeah, so it's weird that we're even talking about this, right? I mean, for the longest time, I mean, long before I was born, but I have heard that-

Katie Martin (2:54)

Even before I was born.

Ethan Wu (2:55)

It was just an expectation. Before you were born, before any of us were born, it was just an expectation in markets that if you're a big, profitable company, you're going to pay a dividend, right?

And stocks are, as you learn in the first year of an MBA, the discounted sum of your future cash flows, and dividends just represent those cash flows going from the company back to investors. But that kind of simple first year MBA model, that hasn't really quite been the trend recently, as a Katie.

Katie Martin (3:22)

No, I mean, dividends have had a bit of a bad time over the past couple of decades. Like if you cast your mind back to even before ancient people such as myself were born, to like a hundred years ago, the whole deal was you had a relationship between a company that listed on a stock market and its shareholders. And the solid expectation was that unless a company ran into some sort of serious difficulty, then it would stick to its commitments to pay a dividend to shareholders. And dividends were much more generous back in the day. So if you go back kind of 80 or a hundred years or something, then shareholders could reasonably expect to get a dividend yield of the S&P 500 or something equivalent to it of like 6%, 5%. You know, this was a meaningful amount of money that companies would pay you in the form of a dividend. And you could do two things with that. You could either take the cash, thanks very much. That's a bit of money. I'm going to spend it on whenever I want.