Company executives looking to give themselves more room for manoeuvre and more power always like to keep as much of shareholder cash as possible.
Look out for its misuse!
Onésimo Alvarez-Moro
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Dividends are as close as stock markets get to an unbroken promise. While earnings oscillate over the cycle and buybacks often disappear when the outlook deteriorates or activist funds leave the register, dividends soldier on. Since 1965, the cash payout of the S&P 500 has never declined meaningfully in real terms. In the worst earnings downturn of that period, in 2001-2, dividends fell by just 6 per cent compared with the 50 per cent collapse in profits. So on paper, signs that dividends have been reaching record levels are welcome. From Swiss reinsurers to the US maker of Viagra, year-on-year rises of more than 20 per cent have been common in recent months.
Dividend payout ratio for Datastream World indexThe trouble is, payout ratios remain worryingly low. Sure, there has probably been a structural shift away from dividends to buybacks, reflecting tax regimes and the shift in incentives created by executive remuneration. UBS estimates that the world’s biggest 600 companies conducted repurchases worth the equivalent of 78 per cent of the value of dividends paid last year. But the fact remains that the payout ratio for the Datastream World index, for example, at 35 per cent, is very close to its record low. Earnings have enjoyed their biggest cyclical bounce for 50 years but companies have been reluctant to pass on the entire benefit in the form of a “permanent” dividend commitment.
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