The hunger for yield is starving CEOs

The dividend-payout ratio is the highest in over two decades as companies indulge demands from yield-hungry investors.

There has been a definitive shift in investor attitudes in the post-global-financial-crisis world. Investors want money now as opposed to having patience to wait for future gains.

This need for management to please investors beyond share price gains has put capital management in the spotlight. At the moment, the dividend-payout ratio is above 70 per cent - hovering around the ratio's peak of 72 per cent not seen since 1992 - even though earnings growth has been relatively tepid.

Dividends aren’t the only way a company can return value – share buy backs and capital returns are becoming prevalent alternatives. However, giving cash back to investors brings into question the long-term capital management of a company and corresponding prospects for growth. Investor pressure is strangling the opportunity for management to make decisions that deliver future profitability.

Graph for The hunger for yield is starving CEOs

Market reaction has been decisive when reality does not meet dividend-payment expectations. When Commonwealth Bank reported results in August the market sent the country's largest bank down 1.1 per cent after it failed to announce a special dividend. Even a raise of the final dividend wasn’t enough to push the Commonwealth Bank into the green on a day when the S&P/ASX 200 index finished flat.

Low interest rates mean it is entirely feasible for companies to return capital using a combination of cash reserves and debt. Or alternatively by buying shares back on market. Perhaps flagging that management have no immediate investment activity on the horizon, Wesfarmers will return $579 million to shareholders in December. The capital return is expected to be funded via debt facilities already in place.

Broadly speaking, buying back shares is one way to hasten the delivery of value to shareholders as opposed to waiting for share price gains to come to fruition. An on-market buy back helped propel CSL Ltd’s share price over the past year. Management announced another buy back in October.
Westfield Retail Trust instigated a $200 million buyback in October of last year following the restructure of jointly owned assets and the sale of assets. The purpose of the buy back was to ‘enhance returns for security holders’. However, shareholders might have preferred a dividend – Westfield Retail Trust has underperformed the real estate infrastructure trust index by some 9 per cent since announcing the buy back.

It is well known Australian investors, particularly self-funded retirees, are hungry for yield in this low-interest-rate environment. At the moment, the market is satiating these demands.

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