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The recent corporate results season has shown unusually generous dividend payouts and an increase in promises of share buybacks. This is in part a natural reflection of the fact that profits and cash flows are booming. But the scale of it suggests that corporate bosses are convinced that investors, in their current mood, like nothing better than to be bribed with their own money.
This has by no means always been so: at times shareholders have been much more captivated by the prospect of future growth. In the late 1990s, dividends counted for very little and it became evident that executives preferred to retain profits in the hope that their stock option packages would become more valuable.
More recently, possibly on the basis of advice from brokers and corporate financiers, they appear to have concluded that share prices will respond very positively to news of dividend hikes and buyback programmes.
That is one interpretation. Another quite different explanation, though, is that at a period of exceptional prosperity, and much improved balance sheets, companies are generating surpluses of capital that they cannot expect to invest at high enough returns when seeking to raise capacity or diversify into new operational areas. This interpretation is clearly negative for growth prospects.
If there is truth in this, it has curious implications for the UK chancellor of the exchequer, Gordon Brown, who justified his imposition in 1997 of dividend tax on pension funds by arguing that distribution of profits was detrimental to corporate investment and growth. Most people saw it simply as a tax raid worth £5bn a year.
At any rate, from 12 per cent a year in 1995, UK dividend growth slumped to hit a low point of minus 3 per cent in 2000 but has now smartly recovered to more than plus 7.5 per cent.
Certainly value, as an investment style, has been trouncing growth since the bubble market peaked in 2000. And high dividend yield is one of the key determinants of value.
During the past year, the total return on the Russell 3000 Value Index has beaten the return on the mirror-image Growth Index by around about 13 percentage points.
This scale of disparity has persisted for five years. In the UK the FTSE 350 Higher Yield Index has outpaced the Lower Yield version by about 8.5 percentage points of total return over the past 12 months.
The specialist boutique Style Research reports that, globally, value factors have remained dominant during the past few months – although with some exceptions, including emerging markets and Japan.
There are signs, too, that in the US the traditional distinctions between value and growth have become blurred. Conventional value and growth screens may now select the wrong stocks.
According to Robert Schwob of Style Research, value stocks have enjoyed two big relative boosts over the past five years or so: first, in 2000 and 2001, growth stocks looked into the earnings abyss as the bubble burst.
Then, from 2003, value stocks benefited disproportionately from economic recovery and surging profits. “These factors have run their course,” he suggests.
Contrarian investors will now be calculating when the rush into value stocks may will finally prove to have run out of momentum.
A strong cyclical upswing in the global economy is normally a period when value factors count heavily positive, as recovery stocks blossom and risk premiums contract.
As the cycle peaks and then declines, however, the durable virtues of growth stocks start to become more apparent.
Is that peak getting close? One interpretation of the reluctance to retain and invest is that listed companies feel exposed to very intense levels of global competition except, perhaps, in their core areas.
This drives investors towards protected sectors, such as banking and utilities; and even at present towards raw materials-based sectors, which are benefiting from excess demand and past underinvestment and are therefore are exhibiting temporary elements of monopoly power. Suddenly, iron ore is hot.
Rising dividend streams can be regarded seen as a sign that corporate bosses are aligning their interests more closely with those of shareholders.
More pessimistically, however, it can be argued that there is an element of “gold mine” financing about prolific dividends. Investors hope to retrieve capital, which which tends to be less safe than in the past because of the often shorter lifespans of listed companies. Profitable seams peter out, even at businesses as historically powerful as Ford Motor, American Airlines and Sony.
In general, though, the corporate sector is at the moment unusually prosperous. A cyclical downturn will put the dividend revival to a traditional test.
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