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Rating:Vanguard Struggles to Reach Dueling Goals Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, June 17, 2004

Vanguard Struggles to Reach Dueling Goals

Reported by Theresa Sim

Vanguard is trying to live up to a lot of expectations these days. The number two player in the fund world is under self-imposed pressure to increase employee profit-sharing dividends and to drastically bulk up employee headcount in its homestate Pennsylvania to meet a promise made to local government.

Vanguard declared a 10 percent increase in dividends under its employee profit-sharing plan, but it may not be enough.

Vanguard's employees will receive a $64.50 dividend per share in their profit-sharing plan for 2003, Dan Wiener, editor of a Vanguard newsletter and close watcher of the company, said. Wiener received the information from unnamed Vanguard employees. Dow Jones also reported that the company grew its dividend by 10 percent on Thursday.

A call to Vanguard was not immediately returned.

The profit-sharing plan works by assigning "partnership" points to employees based on seniority and tenure, the Philadelphia Inquirer reported. For instance, in 2002, more than 90 percent of Vanguard CEO Jack Brennan's compensation came from the profit-sharing plan, spokesman Brian Mattes told a Philadelphia Inquirer reporter.

One unnamed employee told Wiener that this year's news was "better than some had expected," but that "if the dividend had not gone up, there was going to be rioting in the streets." The dividend dropped five percent last year, Dow Jones reported. The dividend news was announced at Vanguard's Charlotte office, Wiener said.

"Normally they do a picnic...this time they just had free lunch in the cafeteria," he added.

This year's dividend represents a 10.4 percent increase from 2002's dividend of $58.40 -- still far from the $100 per share that Jack Brennan set as the company's 2005 goal, said Wiener. To reach that mark, the company will have to grow its dividend by more than 24 percent in 2004 and 2005.

A $100 dividend is not the only goal the company may not reach. Earlier this year, Vanguard reneged on a Pennsylvania state grant awarded to the company in 1999 for projected job and development growth, the Philadelphia Inquirer reported on Wednesday.

Vanguard agreed to the deal in 1999, promising that it would add 6,000 jobs and spend $500 million in development. At the time, the company had 7,500 employees in Pennsylvania. By May 2002, it had only added 803 jobs.

The company notified the state to readjust growth expectations "to levels that were more in line with our current employment growth estimates," spokesman John Demming told the Inquirer.

But will the pressure to meet the terms of the development deal take away from Vanguard's famous efficiencies and cost-cutting? And more importantly for the employees, how will the development deal affect Vanguard's ability to reach a $100 dividend?

Vanguard purchased a 245-acre site using $12 million in state grants, but under a revised agreement with the state, can expand its existing property instead. Demming told the Inquirer "we are moving ahead with our plans for the site."

As for adding jobs, Pennsylvania's governor "is confident that Vanguard will eventually get the jobs they need, just not in the [previously agreed] time frame" the Inquirer reported.

Although the company is not meeting its Pennsylvania employment targets, Demming thinks Vanguard fared better than its peers in the past few years.

Vanguard grew its assets under management by approximately 24 percent from the start of 2001 to the start of 2004, outpacing the industry's total growth of eight percent, but lagging frontrunner the Capital Group by 25 percent, according to Financial Research Corporation data.

What will it take for Vanguard to hit the $100 dividend mark? If more than 20 percent growth in assets translated into less than 20 percent dividend growth, and the company may be saddled with more mouths to feed, it appears that Vanguard will need to ramp up its asset gathering in the next two years to meet its golden number. 

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