Another earnings season winds down in which hundreds of companies revealed how they performed in the past quarter. As a finance professor and investor, I sometimes chuckle when I hear people complain that their company does not have a profit-sharing program, arguing that employees — in addition to compensation and benefits — deserve to share a portion of their company's profits because they helped generate this financial surplus.
Large corporations already have a generations-old, highly-accessible version of profit sharing that too many seem to forget: dividends. In the last four quarters, 414 corporations out of the 500 included in the S&P 500 distributed a cash dividend. That's nearly 83 percent of the S&P 500 willingly choosing to distribute at least some of their earnings to shareholders. Alternatively, these same dividend paying corporations have a median payout ratio of 35 percent, meaning that for every dollar of profits, a dividend paying corporation in this same index paid out roughly 35 cents in the form of cash dividends (stock buybacks are not included and can be an alternative form of returning money to shareholders).
So what's the catch? Well, to be eligible for a dividend, you need to risk your capital. Said more provocatively: You need to pay to play. Herein we can easily forecast how the idea of dividends as profit sharing would be framed — incorrectly — as a losing proposition for the little guy. Becoming a shareholder means buying stocks, which can fluctuate in price with market swings and expose investors to capital losses. In addition, why should we assume that Apple, T. Rowe Price, Walmart and the hundreds of other dividend payers will continue to declare dividends, making shareholders on record eligible to receive quarterly cash payments? Won't they just stop paying these dividends in a turbulent economy?
I am one of many finance wonks who has studied dividends for years and have come to conclude that dividends are "sticky" because companies that start paying dividends usually continue to do so. And decreasing dividends, or stopping dividends once they've started them, can be tricky for corporations for many reasons. One big reason: expectations. In financial analysis and planning, we look at past or prior performance to help form our beliefs and outlook for the future. McCormick & Company, the multinational food and spice corporation headquartered 15 miles north of the main campus where I teach, has paid regular dividends since before I was born. Why would they stop paying dividends now or next year after more than three decades of regular dividend payments? They have operated in booms and recessions, yet religiously paid (and grown) their dividends largely to meet or exceed the expectations of each and every one of their investors. Yes, stock prices fluctuate, but as long as an investor has the risk appetite to invest in equities, dividends can be one of many rewards for being an owner of a corporation.
But what about employees? We have been told that they, too, should be rewarded for the profits they help generate, without taking an equity stake in the company for which they work. Much like with expectations for dividends, the expectation of a job to return to the next day and a regular paycheck is how publicly traded and privately held firms in our market economy reward, recognize and appreciate the hard work of their employees. That system continues to inspire tens of millions of Americans to dedicate their careers to helping their employer compete and innovate, ultimately maximizing value for customers and shareholders and driving economic growth.
If profit sharing is important to you, I implore you to invest in corporations that pay dividends, whether you work for those corporations or not. That's profit sharing, and you didn't even have to go to work for it. Your money did the work for you.
Mark A. Johnson is an associate professor of finance at Loyola University Maryland and can be reached at majohnson@loyola.edu.