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Dividend cuts may bode well for future

The nation's second-largest banking empire and the third-biggest computer company. A major insurance conglomerate, and an airline with routes in 36 states. So goes the "honor roll" of publicly held businesses that have slashed or eliminated dividends in the past few weeks amid deepening recession fears on Wall Street.

Chase Manhattan, Unisys, Travelers Corp. and USAir Group are by no means isolated cases. Through the first nine months of 1990, corporations announced 278 dividend omissions or reductions, according to Standard & Poor's Corp.

It is shaping up as the biggest crop of adverse dividend actions since 1982, S&P says. On the other side of the coin, dividend increases are setting their slowest pace since 1971.

"These statistics will likely get worse before they get better, especially if a full-fledged recession develops," says Richard Evans, research director at Dow Theory Forecasts, an investment advisory firm in Hammond, Ind.

All this has had a manifest impact in the stock market, which lately has traded at its lowest levels since the spring of 1989. Dividend cuts and suspensions are distinctly unpopular in the world of big-time money management.

But, as unsettling as these developments may be, some analysts say investors should not necessarily take them as cause for despair about the future course of stock prices.

In fact, maintains Mark Stumpp at the investment firm of PDI Strategies, it may even be a sign that stocks are due to take a turn for the better in the not-so-remote future.

To reach that conclusion, Stumpp examined how stock prices performed since 1960 after years of varying degrees of dividend growth.

The peak dividend years, averaging payout growth of 13 percent, were followed in the ensuing six-month periods by returns on the Standard & Poor's 500-stock composite index averaging a paltry 1.8 percent.

Within the three-decade sample, Stumpp found, as the dividend-growth rates diminished, the stock market's performance over the following six months steadily improved.

At the other extreme, after years in which dividends eked out a meager 0.3 percent increase, stocks chalked up an average gain of 10.1 percent.

"Abandoning stocks because dividend growth is low has a certain intuitive appeal, but it's a poor investment strategy," Stumpp concluded.

Analysts say the reasons for this seeming anomaly aren't hard to discern. For one thing, they say, corporate directors tend to resist making dividend changes, either up or down, until the underlying forces that mandate them are clearly established.

If they act hastily, they risk hurting their credibility and their companies' image of stability among investors and the other constituencies, including employees and customers, with which they must deal.

So by the time a dividend is either raised or lowered, the circumstances warranting the action tend to be well known among stock traders.

At any given time, furthermore, those traders are usually preoccupied not with the present, but with trying to see as far into the future as they can, always bearing in mind the business cycle.

"Periods of high dividend growth tend to be followed by periods of slower growth," said Stumpp. "The investment implication is that skyrocketing dividends signal that it's time to worry because growth is likely to slow in the future.

"Our interpretation? Last year was the time to have been worried about dividends."