The shareholder payout boom continues, but can companies afford the high levels of dividends and shareholder buybacks? Are investors encouraging companies to accelerate their own demise, rather than acting as responsible stewards of capital?
Does anyone else have a growing sense of unease about the level of dividend payouts and share buybacks going on at the moment? They are a significant part of what is driving valuations of many US banks, for example, but they speak to a lack of sustainability over the long-term.
Are these companies investing enough for their future growth? And if they are borrowing to finance these pay outs to shareholders, does that spell doom for the years to come?
Investors should be careful about
celebrating the payout bonanza.
Robin Wigglesworth makes a staggering point in his FT article from 22 February: US companies have bought back about $3.5trn since 2010, which, when combined with $2trn of dividends, comes to a considerably greater sum than the Federal Reserve’s entire quantitative easing (QE) program. Yet, I’ve definitely read more articles in the last few years about the potentially damaging effects of QE than I have about the potentially damaging effects of shareholder payouts.
Expectations are that many US companies will use Trump’s tax cuts and the recent slide in share prices to buy back more stock this year.
Two key questions worry me: firstly, if companies are paying out money on this scale, can they really be investing enough to ensure their earnings continue to grow at a rate that makes these payouts sustainable over the long-term? And second, as many of these payouts are debt financed, that rise in corporate profits is all the more important, especially as payouts have been a significant driver of US stock prices in the recent past. How sensitive have markets become to a cut in dividends?
S&P, the credit rating agency, warned earlier in February that the recent rise in corporate profits would not be enough to offset the risks associated with companies high debt levels. A decade after the global financial crisis, S&P says corporate leverage is worse than it was at pre-crisis levels after it “exploded” as a result of the cheap credit made available by unprecedented levels of QE.
So why aren’t companies using the money they are spending on buyouts to boost their future earning potential? And why on earth are they borrowing so much to rob themselves of their future sustainability?
It seems a bit nuts. It looks like these companies are trying to accelerate their own potential demise. If payouts are propping up stock valuations, how quickly are investors going to dump companies when they start their inevitable process of cuts? And if they try to avoid this by keeping up payouts, then they will become unsustainable all the more quickly.
So why are investors so keen to encourage this behaviour? Short-termism, pure and simple.
Investors should be careful about celebrating the payout bonanza. They will surely spell doom over the long-term. Shouldn’t investors be pushing companies to invest for sustainable growth or pay down debt, especially where those investors have a fiduciary duty to provide sustainable risk-adjusted returns over the long-run?
Fiduciary duty is not just about what you chose to put in a portfolio. It’s also about how you behave as a steward of capital, and by extension companies. Could and should investors be doing more to focus company Boards’ attention on long-term sustainability? Especially as volatility picks up and the credit cycle starts to reverse…
Is time running out for high shareholder payouts?
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A quick cuppa with Faith Ward, Chief Responsible Investment and Risk Officer, Environment Agency Pension Fund