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A very bullish development By Mark Hulbert

Commentary: What Disney’s dividend hike means for the economy

* Thursday, December 1, 2011

CHAPEL HILL, N.C. (MarketWatch) — The most bullish thing the market can do, according to the age-old saying, is to go up.

And according to that standard, at least, Wednesday’s market action was very bullish indeed — with the major market averages rising by more than 4%.

But there was another very bullish development on Wednesday that was largely overlooked in all the attention being paid to the overall market: Disney hiked its annual dividend from 40 cents to 60 cents a share.

Now, I admit that this news does not, at first blush, seem even remotely as momentous as a 490-point rise in the Dow Jones Industrial Average . But I nevertheless think it is, because of what it signals about Disney’s future — and, by extension, the economy as a whole.

Notice, for starters, that Disney’s dividend hike amounts to a 50% increase. That’s a far bigger percentage than is typical for a company as large as Disney. And it comes on top of a 14% increase in its dividend a year ago.

Secondly, companies will go to great lengths to avoid ever cutting their dividends. So if Disney’s management harbored any significant doubts about the company’s ability to maintain its impressive recent profitability into the future, it’s a good bet that they would not have increased their dividend.

Putting these two factors together, Disney’s dividend increase can be seen as a strong vote of confidence by management in the company’s future.

There’s a third factor worth noting as well: Disney is in the entertainment business. Its profitability would suffer if the economy were about to go into a sustained downturn in which the typical consumer had to cut way back on discretionary expenses. So, to that extent, management’s vote of confidence extends to the economy as a whole.

Am I reading too much into the vote of confidence that Disney’s management is apparently making?

For insight, I turned to Roni Michaely, a finance professor at Cornell University’s Johnson Graduate School of Management. Michaely is one of academia’s leading experts on what corporate management is signalling through dividend increases.

In an interview Wednesday afternoon, Michaely told me that, based on his extensive research into past dividend increases, Disney’s recent dividend hike can be seen as increasing the odds that the company will be able to maintain the heightened level of profitability that it has earned in recent years. Because of that dividend increase, he said, the “likelihood that Disney’s earnings will decrease in coming years is lower than before.”

This doesn’t amount to a guarantee, of course. Michaely hastened to point out that his comments are based on an average of thousands of companies he has analyzed over the years, and that there are plenty of counterexamples of companies that increased dividends only to subsequently fall on hard times.

So it’s a matter of playing the odds, as it always is in this business. But Disney’s dividend hike does increase the probabilities that it will be able to at least maintain its recent heightened profitability. And that has to be a long-term positive for the economy as a whole.

http://www.marketwatch.com/story/a-very-bullish-development-2011-12-01?link=home_carousel

George.

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