From 1948 to 2012, US corporate profits grew from USD (constant, 2009=100) 230.6 billion to 1,913.8, at the average annual rate of 3.36%. The portion of profits allocated to dividends grew, in chained USD billion, from 51.4 to 733.6, at the rate of 4.24%, and undistributed profits grew from 87.4 to 766, at the rate of 3.45%. Taken as indexes for 1948=100, the three variables stick together until the 1980s, then they grow apart, with net dividends leaving the other two variables behind — trends are given by the respective regression (dotted) lines. At a closer view, we detect two distinct stages:

1. 1948-1988: In billion USD, the share of profits allocated to dividends is always smaller than the undistributed profits. However, in relative terms, the growth of corporate profits is more advantageous for shareholders than for undistributed reserves, the former growing at the average annual rate of 3.57%, while the latter grow at 2.46%. As a consequence of this bias, the USD amount allocated to each is rather similar by 1988, reaching 209.4 billion for net dividends and 231 billion as undistributed profits.
2. 1988-2012: the USD amounts allocated to dividends are higher than the undistributed profits, exception made of the 2010-2012 crisis years that registered a trend reversal. Nevertheless, this reversal leveled out fast, the delta in favor of undistributed profits shrinking from a 30% margin in 2010 to only 4% in 2012, thus reestablishing what can be viewed as the current normalcy. In spite of the turnabout, during this period dividends grew faster than undistributed profits: 5.36% against 5.12%.

Decades ago, management wisdom claimed that the keys to success were business growth, development and innovation under conditions of sound financial management, i.e. without recourse to debt that the operational results could not pay back. Undistributed profits played a crucial role in the pursuance of this strategy. They fed the treasure chest providing self-financing resources, readily available to bridge a balance-sheet gap, to escape unscathed from the occasional market storm, or to grasp business opportunities otherwise vetoed by risk-averse stakeholders. This approach demanded well-managed operations and healthy financial ratios.

The doctrine changed altogether by the turn of the 1970s, when 'maximizing shareholder value", in other terms offering shareholders high returns for their investment, was promoted to the rank of ultimate criterion of good management. Business operations became just a milking cow to immediately provide stockholders with value-growing stocks and juicy dividends. If the business can not deliver high yields, financiers will go elsewhere — the cow would better produce plenty of milk, or else it will be sold for steaks.

The "undistributed profits" approach is blamed for tarnishing the corporation's attractiveness for investors, and for putting all the eggs in the hands of the managerial class at the expenses of the owners. However "value based management", another name for the new approach, is not exempt of criticism:

• It favors short-term, to the detriment of long-term rewards.
• It views operations as a cost variable to be constrained, at the risk of compromising production capacity, employment, service to customers, product quality and reliability, and product innovation.
• It induces arcane "financial engineering" scaffoldings to boost the shareholders' s cut by whatever expedients at hand: dividends, bought-back shares, asset sales, business spin offs, sophisticated debt schemes, and other obscure contrivances to augment the value of stock.

The chart below clearly shows the growing chasm between net dividends (Div) and undistributed profits (Und) relative to Net operating profits (Profit), as given by the differences (Div-profit, and Und-profit) between the respective values provided in the table. Trends are indicated by the regression (dotted) lines.

Trends of US corporate net dividends and of undistributed profits relative to net profits  

Sources: see BEA - US Bureau of Economic Analysis

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