Back in my broker days a client who happened to be the heaviest hitter in the book of business managed by my partner and me once asked, in response to my partner’s comment that a relatively small sum would be swept into his cash account, whether he’d “ever heard the one about the man peeing in the ocean.”

“Every little bit counts.”

And even just a little bit more is much better than a little bit less.

So it goes, of course, with the recently concluded earnings reporting season Down Under that we have to talk about the downside of dividend growth.

Generally speaking, there’s no better indication of a healthy underlying business than a rising payout. Myriad factors may drive short- and medium-term market moves. But over the long term growing a dividend is a sure way to grow a share price.

That’s the basic distillation of the philosophy informing not just Australian Edge but Canadian Edge and Utility Forecaster as well.

At the same time, it’s axiomatic that dividend growth is best accomplished by a growing business. And growing a business requires capital investment.

Trouble Man

Reserve Bank of Australia Governor Glenn Stevens, in testimony before a Parliamentary committee in late August speech, criticized moves by large cap Australian companies to heed investor demand for stepped-up dividends and share buybacks rather than plow cash into growth initiatives.

Thirty-four members of the AE How They Rate coverage universe–30.6 percent of the individual companies listed–announced or confirmed higher final or interim dividends during the recently completed earnings reporting season.

Fifteen Portfolio Holdings boosted their payouts. In addition to raising its final dividend by 1.9 percent Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY) declared a special dividend of AUD0.10 per share, as it distributes proceeds from the sale of its insurance business to shareholders.

Wesfarmers reported a 4.2 percent in fiscal 2014 revenue from continuing operations to AUD60.2 billion. Net profit after tax (NPAT) was up 18.9 percent to AUD2.69 billion. And management noted that retail sales have strengthened during the first quarter of fiscal 2015.

Wesfarmers is a buy under USD40 on the Australian Securities Exchange (ASX) using the symbol WES and on the US over-the-counter (OTC) market using the symbol WFAFF.

Wesfarmers also trades on the US OTC market as an American Depositary Receipt (ADR) under the symbol. Wesfarmers’ ADR is worth 0.5 of an ordinary, ASX-listed share and is a buy under USD20.

Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY), which announced a dividend increase for the second time in calendar 2014 after not doing so since February 2005, will also buy back AUD1 billion shares via an off-market tender process.

Australia’s dominant telecom reported a 3.4 percent increase in fiscal 2014 sales revenue to AUD25.1 billion, while earnings before interest, taxation, depreciation and amortization (EBITDA) were up 4.7 percent to AUD11.1 billion.

NPAT from continuing operations grew by 25 percent.

Telstra is a buy under USD5.50 on the ASX using the symbol TLS and on the US OTC market using the symbol TTRAF.

Telstra also trades on the US OTC market as a Level I, sponsored ADR. Telstra’s ADR is worth five ordinary, ASX-listed shares. Telstra’s ADR is a buy under USD27.50.

Rio Tinto Ltd (ASX: RIO, NYSE: RIO), which boosted its interim dividend by 10.3 percent, once again alluded to material cash returns to investors after the miner announced forecast-beating half-year figures and struck a bullish tone on the outlook for iron ore.

Rio Tinto reported a 21 percent increase in 2014 first-half underlying earnings to USD5.1 billion, while cash flow from operations was up 8 percent to USD8.7 billion, as iron ore volume grew by 10 percent. Net debt also came down by USD6 billion year over year.

Rio Tinto is a buy under USD65 on the ASX using the symbol RIO.

Rio Tinto is dual-listed on the London Stock Exchange. Its New York Stock Exchange (NYSE) listing is an American Depositary Receipt (ADR) that represents one share of the company’s London listing. The London listing and the New York listing both represent the same underlying business as the Australia listing.

Rio’s NYSE-listed ADR–which also trades under the symbol RIO–is a buy under USD62.

Rio’s chief rival for global mining supremacy, BHP Billiton Ltd (ASX: BHP, NYSE: BHP), raised its final dividend by 5.1 percent.

But some analysts, miffed that management didn’t announce a share buyback, downgraded the stock.

The miner reported fiscal 2014 revenue growth of 1.9 percent to USD67.21 billion, while net profit surged by 23.2 percent to USD13.83 billion and underlying profit rose 10.1 percent to USD13.45 billion.

Free cash flow was up by USD8.1 billion on CAPEX reductions and cost cuts, despite weaker commodity prices. BHP Billiton is a buy up to USD40 on the ASX.

BHP’s NYSE listing is an ADR that represents two ordinary shares traded on the ASX. Buy BHP on the NYSE up to USD80.

Mr. Stevens suggested that such capital management would inhibit a business-led economic recovery Down Under.

Members of the Standard & Poor’s/Australian Securities Exchange 200 Index paid out AUD67.8 billion of dividends during the fiscal year ended June 30, 2014, according to data compiled by Credit Suisse.

That’s up 10.6 percent from AUD61.3 billion distributed to shareholders during fiscal 2013.

A little more than three-quarters of S&P/ASX 200 companies reporting full-year results lifted or maintained dividends.

The perception is that companies announced sharp dividend increases. What’s really happening is that more companies are choosing to pay dividends to better position themselves to compete for investor capital.

In the case of Basic Materials companies Panoramic Resources Ltd (ASX: PAN, OTC: PNAJF) and Western Areas NL (ASX: WSA, OTC: WNARF), both nickel producers, management reinstated dividends after market conditions turned back in their favor.

As a dividend-focused investor I’m generally happy when companies I own raise their payouts. The key question is whether management is plowing enough cash back into the business to ensure future growth, for dividends as well earnings.

In an environment defined by caution due to economic uncertainty, it’s quite clear that companies are choosing to reward investors in the here and now rather than make capital expenditures.

The RBA recently forecast that CAPEX for fiscal 2015 would be AUD145 billion, about 10 percent lower than the survey indicated this time last year for fiscal 2014, according to Westpac Banking Corp (ASX: WBC, NYSE: WBK).

The actual number for 2013-14 was AUD158 billion.

In the decade before the Great Financial Crisis the average Australian industrial company reinvested 70 percent of its free cash flow back into its business and returned 30 percent in dividends. Now that ratio is closer to 50-50, according to Goldman Sachs.

As Mr. Stevens noted to Parliament, “Any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand.”

Combined cash holdings of S&P/ASX 200 companies that reported fiscal 2014 results last month grew by 24 percent over the year to AUD112.6 billion, according to Commonwealth Securities.

The prevailing theme among companies is fiscal restraint, with a reluctance to spend on projects that may or may not deliver acceptable returns given the questionable state of demand in Australia and in its export markets.

Management teams remain focused on cutting costs, directing CAPEX to ­productivity gains, with the net result of higher margins and improved ­dividends for shareholders.

“Productivity” usually means reducing headcount. And it’s hard to see how putting more people out of work is a good thing for long-term economic fundamentals.

But it’s hard to question management teams that choose to return surplus capital to shareholders in as tax-effective a manger as possible. It’s a much better outcome than having companies splurge on acquisitions just because they feel the cash burning a hole in their pocket.

The focus on shareholder returns through dividends, special dividends and share buybacks is driving the ASX higher.

And the dividend yield still looks compelling against any other investment. Until there’s some narrowing of the spread between risk-free rates of return around the world and average dividend yields, equities markets will continue to do well.

Shares of companies that returned surplus cash outperformed the market by 3 percent a week after the ­announcement, according to Bank of America ­Merrill Lynch.

The market is rewarding defensive, high-yield income right now.

Top Line, Bottom Line

Almost 69 percent of the 141 companies that reported full-year earnings for the 12 months ended June 30, 2014, reported improved earnings, according to Commonwealth Securities, the best showing since fiscal 2010.

Commonwealth Bank of Australia (ASX: CBA, OTC: CBAUF, ADR: CMWAY) equity research showed that reporting season results were broadly in line with consensus forecasts, which had been downgraded in May and June.

For the S&P/ASX 200, 31 percent of companies beat forecasts and 28 percent missed.

Revenue results were a little weaker, and the outlook for top-line growth remains far from robust.

Also of note was the fact that outlook statements from companies were more guarded than usual with many companies citing an uncertain outlook for the domestic economy as a reason for this.

We’ll be paying close attention to presentations by Portfolio Holdings during upcoming annual general meetings–what many refer to as “confession season.”

For fiscal 2015, as it was for fiscal 2014, earnings are likely to once again be driven by cost reductions, restructuring and interest savings rather than robust revenue growth.

Portfolio Holdings CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY) and Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF), which is actually pursuing a rather aggressive CAPEX plan but is concentrating its growth efforts in Europe and Asia, beat on both revenue and earnings.

CSL reported fiscal 2014 revenue growth of 7.7 percent to USD5.33 billion, as NPAT was up 7.8 percent to USD1.31 billion, or USD2.70 per share, on double-digit immunoglobulin, albumin and specialty products growth.

And management boosted the final dividend by 15.4 percent to USD0.60 per share.

CSL is a buy under USD72 on the ASX using the symbol CSL and on the US OTC market using the symbol CMXHF.

CSL also trades on the US OTC market as an ADR under the symbol CMXHY. CSL’s ADR, which represents 0.5 of an ordinary, ASX-listed share, is a buy under USD36.

Ramsay, which raised its final dividend by 22.9 percent, reported fiscal 2014 revenue growth of 17.6 percent to AUD4.9 billion, while core NPAT was up 19 percent to AUD346.2 million and earnings per share rose 20.6 percent to AUD1.64 on overseas acquisitions.

Management guided to fiscal 2015 core NPAT and EPS growth of 14 percent to 16 percent. Ramsay Health Care is a buy under USD52.

Outside the AE Portfolio, evidence of revenue and earnings growth was scant.

Highlights include mining services outfit MACA Ltd (ASX: MLD), which raised its final dividend by 36.4 percent. Management reported a 25 percent increase in fiscal 2014 revenue, 18 percent EBITDA growth and 12 percent NPAT growth.

Of note is that work in hand as of June 30, 2014, was AUD1.3 billion. And MACA also raised AUD58.5 million via a share offering, with proceeds to support growth initiatives. MACA is a buy under USD2.50.

And oil and gas producer Santos Ltd (ASX: STO, OTC: STOSF, ADR: SSLTY) boosted its interim dividend by 33.3 percent, as management reported a 24.9 percent increase in 2014 first-half sales revenue to AUD1.89 billion and 2.8 percent growth in underlying NPAT to 2.8 percent.

Operating cash flow was up 18 percent to USD744 million on the ahead-of-schedule startup of the Papua New Guinea Liquefied Natural Gas project.

Santos is a buy under USD13.50 on the ASX using the symbol STO and on the US OTC market using the symbol STOSF.

Santos also trades on the US OTC market as an ADR. Santos’ ADR is worth one ordinary, ASX-listed share. Santos’ ADR is a buy under USD13.50.

Key earnings details and current advice for companies included in the table “The Dividend Growers” can be found in either this month’s or last month’s How They Rate table “Comment” section.