Business & Money

Will dividends become the sole focus for investor valuations of utilities?

With last month's favorable Senate vote to repeal the tax on dividends from 2004-2006 and reduce it 50 percent this year, and the high-profile conference committee meetings between the House and the Senate at press time, many are asking if investors are, or should be, beginning to evaluate utility companies solely on the basis of the dividend.

Paul Patterson, an analyst with Glenrock Associates, in a report titled Dividend Yield: Implications for Value & Capital, outlines some of the issues surrounding the increased focus on the dividend. While he believes that the dividend tax repeal would be positive for utility valuations, he does not believe that investors will rely solely on the dividend in stock value determination. Rather, the dividend will be viewed as only one factor among many.

Patterson does not believe that the dividend discount model (DDM) should be used as the sole means of determining a given stock's value. In the report, Patterson evaluates the DDM and finds several reasons why investors should be cautious in relying solely on DDM. Patterson believes that DDM fails in situations where there is a great deal of uncertainty as to the future growth, or lack thereof, of a company.