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The alternative case for dividend payouts
By Rob Prugue*
When I read the piece [last week’s edition of Investor Strategy News] advising investors to “beware” of high dividends and payouts, I wanted to see if there was a ‘comment’ section underneath as I wanted to challenge such a view.
(Investor Strategy News does not have ‘comment’ sections under individual reports but we welcome all reader comments and endeavor to publish them.)
As you can appreciate, given my tone, I don’t quite agree with such a view on the following grounds:
>Â Payouts are a function of internal versus external funding. If a company can deliver returns on projects higher than the cost of funding, shareholders are better off having companies retain the earnings in order to see the capital grow internally. Â In CFA level I, this is called Internal Growth Rate, or earnings retention multiplied by the ROE. Â
>Â But given QE, signs of asset deflation, and a poor corporate investment track record, is anyone really surprised that companies are paying it out, let alone investors asking for their money? Â Corporate activists have been vocal in demanding companies pay out dividends, let alone the increasing army of retirees. Â Greed isn’t good, but cash most certainly is.
>Â Once you see corporate investment rise (which of late its falling everywhere in the world), the only ones who should “beware” are those who see companies increasing, or even retaining, a high earning rate. Â Whilst some may argue that compared to the last 20 years earnings retention rates are falling, the Black Swan would suggest that its coming down to 50-year averages, whereby the last 20 WAS the anomaly. Â
Anyway, apologies if this missive of mine sounds arrogant or “know it all”. Â Just a pet peeve of mine, using divergences from historic norms as a signal of anything, without considering conditions of late are anything BUT like they were in the last 20 years. Â So, with respect to the author, I’d suggest an alternative theory behind such a move.
*Rob Prugue is the regional chief executive officer for Lazard Asset Management, currently based in Singapore.
