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:
> 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. In CFA level I, this is called Internal Growth Rate, or earnings retention multiplied by the ROE.
> 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? Corporate activists have been vocal in demanding companies pay out dividends, let alone the increasing army of retirees. Greed isn’t good, but cash most certainly is.
> 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. 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.
Anyway, apologies if this missive of mine sounds arrogant or “know it all”. 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. 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.
