WHY don't equity investors get the full benefits of economic growth? Or to put it another way, why don't dividends grow as fast as GDP? We tend to assume that, over the course of the cycle, profits will grow in line with the economy. But research by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School, shows that real dividends in 21 countries fell by an average of 0.12% a year between 1900 and 2014; in the US, they grew by 1.7% but still below the GDP growth rate.
A plausible-sounding explanation is that, over time, the dividend payout ratio has fallen; companies are reinvesting more of their cash. Some companies, of course, don't pay dividends at all and paying high dividends is associated with mature, slow-growing companies; utilities, for example. But this reasoning does not really work at the aggregate level. If companies have been profitably reinvesting all their free cash, surely that would have showed up in higher dividends by now; the data cover more than a century. And research by Robert Arnott and Cliff Asness shows that high payout ratios are followed by periods of high earnings growth, not low. Low payout ratios were followed by periods of slow earnings growth; companies, in short,...Continue reading
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