Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Dividend Pause That Tells Us Everything
Transcript
- Lucas: S&P 500 hits 7,519, small caps up more than six percent in a week, the ten-year yield dropping — and yet, most companies are sitting on their hands when it comes to dividends. Luna: Sitting on their hands how? Dividends have been growing for years. Lucas: They have been. But look at the first quarter of 2026. Dividend growth among S&P 500 companies slowed to its lowest pace in four years. Barely two percent year over year. Meanwhile, buybacks hit a record. Companies are returning cash, but they're choosing the route that gives them more flexibility. Luna: So they're still returning capital, just not via the more 'permanent commitment' channel. That's interesting. Lucas: Exactly. And that's the quiet signal. Buybacks can be turned off overnight. A dividend cut is a reputational event. So the fact that companies are pausing dividend growth while firing up buybacks says something about how management teams see the next twelve to eighteen months. Luna: And speaking of signals — quick honest thing. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes possible. No ads, no sponsors, just people who find value in the conversation. Lucas: Yeah, it matters. And it keeps us independent, which is the whole point. So if you've been listening and getting something out of it, that's the link. Luna: Alright, back to the dividend pause. What do you think is driving it? Uncertainty? Lucas: Partially. You've got the Iran situation rattling energy markets, consumer sentiment at a record low — people are feeling inflation at the pump and the grocery store. But I think there's a more structural reason too. Luna: Which is? Lucas: Companies are genuinely unsure what the interest rate environment looks like a year from now. The Fed Funds rate has been flat at 3.62 percent for over a month, but the yield curve is still inverted in parts. The two-year is above the ten-year. That's a classic recession warning, even if the economy hasn't tipped over yet. Luna: So if you're a CFO, why lock yourself into a higher dividend payout if borrowing costs might stay high and revenues might slow? Lucas: Right. And there's a specific example I want to highlight. One of the big regional banks — not naming names, but think of a large Midwest-based bank — actually cut its dividend in the first quarter. That's the first cut from a major bank since the pandemic. Luna: Ouch. That gets attention from income investors. Lucas: It does. And what was their explanation? They said they wanted to build capital reserves ahead of potential loan losses. So even though the economy is still adding jobs — nonfarm payrolls up again in April — there's caution at the individual company level. Luna: Meanwhile, the buyback numbers. Do you have a sense of the scale? Lucas: S&P 500 companies spent roughly $280 billion on buybacks in Q1 2026. That's up about fifteen percent from the same quarter last year. It's not quite the peak of late 2023, but it's close. And the interesting thing is, the companies doing the most buybacks aren't just tech. Luna: Who else? Lucas: Financials and energy. Both sectors have strong cash flows right now. Energy companies, despite oil price volatility, are generating a lot of free cash flow. And banks, with higher net interest margins, have plenty of capital. But they're choosing buybacks over dividends. Luna: So what does that tell us about management confidence? Because you'd think if they were really bearish, they'd hoard cash, not spend it on buybacks. Lucas: That's the nuance. Buybacks signal that management thinks the stock is undervalued, or at least that it's a good use of cash. But they also signal that they want optionality. A dividend increase would be a long-term commitment. A buyback is a one-off. So it's not pure bearishness — it's a hybrid view. Luna: A 'cautious optimism' that's more cautious than optimistic? Lucas: Exactly. And the data on cash holdings backs that up. Non-financial corporations in the S&P 500 are sitting on about $2.3 trillion in cash and short-term investments. That's down from the peak of $2.6 trillion during COVID, but still historically high. So they have the money to increase dividends. They're choosing not to. Luna: What about the sectors that are actually increasing dividends? Are there any bright spots? Lucas: Utilities and consumer staples. Boring, reliable sectors. They tend to hike dividends every year regardless. But even there, the pace has slowed. A utility that usually grows its dividend by six percent only grew it by four percent this year. It's a pattern. Luna: And what does that mean for income investors? People who rely on dividends for retirement income. Lucas: They're going to have to look harder. The dividend yield on the S&P 500 is around 1.3 percent right now. That's not much. So they're turning to bonds — the ten-year Treasury at 4.49 percent is competitive. That's another reason companies don't feel pressure to raise dividends: investors can get decent income elsewhere. Luna: So the dividend pause is partly a function of the bond market offering a better risk-free return. Lucas: Partly. But there's also a tax angle. Buybacks have been more tax-efficient for shareholders since the 2017 tax cuts, and even with the 1% excise tax on buybacks that started in 2023, it's still often better than dividends for taxable accounts. So the structure of the tax code is nudging companies toward buybacks. Luna: That's a good point. And do you think this pattern will persist? Or will dividends come back when uncertainty clears? Lucas: I think dividends will come back eventually, but not until companies feel more confident about the economic outlook. And that means either the Fed cuts rates decisively, or the geopolitical situation stabilises, or both. Right now, we have neither. Luna: So the dividend pause is a canary in the coal mine for the broader economy. Lucas: I think so. It's a subtle signal, but it's revealing. When you see companies that have plenty of cash, plenty of earnings, but they're holding back on the most shareholder-friendly move they can make — that's worth paying attention to. Luna: And we'll keep watching. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. If you want to support the show, you know where to find us.