Analysis and Trends High Payout Ratio High Earning Growth in the Future

7/31/2019 Analysis and Trends High Payout Ratio High Earning Growth in the Future

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Dividend strategies

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Decisive Insightsfor forward-looking investmentstrategies



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Dividend strategies

Content

Imprint

Allianz Global InvestorsEurope Gm H

Mainzer Lan stra e 11–13

60329 Fran urt am Main

Capita Mar et Ana ysis

Hans-Jörg Naumer jn ,

Dennis Nac en n ,

Stefan Scheurer (st),

O ivier Gasquet og

Data origin – i not ot erwise note :Thomson Financial Datastream.

Ca en ar ate o ata an c arts –

i not ot erwise note : 12 31 2011

4 Hig payout ratio = ig earningsgrowt in t e future

7 W at oes t is mean for investors?

8 Regional outloo

9 Decisive insig ts



Dividend strategies

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Companies that retain a large part of their

earnings usua y o so on t e groun s t atey are investing in new projects to ac ieve

urt er growt . Converse y, t is wou mean

hat companies with high payouts or those

it ig ivi en yie s wou grow ess.

Are t ese exp anatory mo e s rea y va i ?

As a start, the following relation is undisputed:

e growt o a company g rises in ine wit

e proportion o earnings t at is retaine an

ot istri ute 1-p , provi e t at – an t is

is the crucial factor – the profitability (RoE) ofe new investments remains sta e:

(1) g = (1-p) * RoE.

High payout ratio = high earningsgrowth in the future

In t e case o equity investments, t is in i-

cates t at t e expecte return R or compa-

nies wit a re ative y ow payout ratio p or

ow ivi en yie DY can e compensate

y ig er uture growt :

(2) R = p * E / P + g = DY + g,

w ere E = earnings an P = price.

Is it really the case, however, that future

growt or companies wit a ow payout ratio

is rea y ig er? Arnott an Asness con ucte

n empirica stu y o t e corre ation or t e

overall US equity market in their article pub-

is e in t e Financia Ana ysts Journa FAJin 2003, “Surprise! Hig er Divi en s = Hig er

Earnings Growt ”1. T ey reac t e o owing

conclusion for the Standards & Poor’s 500

S&P 500 :

At in ex eve , t e payout ratio is a goo

leading indicator of future earnings growth.

An initia y surprising corre ation nevert e-

ess appies: t e ig er t e payout ratio, t e

ig er – not ower – t e uture earnings

growth, adjusted for the rate of inflation! Theea time is ive to ten years, so t e corre ation

pp ies as a re ative y ong-term tren an not

over t e s ort term.

T is ana ysis is an artic e written y Ste an

Ho ric ter.

Ste an Ho ric ter is G o a ea o t eEconomics an Strategy Department at

A ianz G o a Investors. He is responsi e

or ana ysing economic an capita mar-

et tren s. He is a mem er o t e G o a

Po icy Committee, w ic eve ops t e

trategic investment strategies at Allianz

G o a Investors.

The higher the payout ratio, the better the expectation for theearnings trend.

You can also find addition-

al, in-depth insi ht into thistopic in the study entitled

“Dividend strategies –

an attractive a ition to

your port o io at:

www.allianz i.de/

capitalmarketanalysis

1 Robert D. Arnott, Clifford

S. Asness, “Surprise! Hi her

Dividends = Higher Earn-

ings Growth”, Financial

Ana ysts Journa , Vo . 59,

No. 1, January / Fe ruary

2003



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It is of course also possible that the results

turn out i erent y or particu ar companies,

suc t at a ow payout ratio ea s to ig

earnings growt . As an average o t e com-

panies represented in the index, however, the

corre ation escri e a ove oes app y. It isa so sta e over time.

Arnott and Asness suggest three explanations

or t e researc resuts, w ic are contrary

to t e expectations o many investors at irst

sig t.

First y , any increase or, as t e case may e,

re uction in t e ivi en – w ic entai s a

correspon ing c ange in t e payout ratio –

indicates a high level of confidence held byt e company’s management wit regar to

rising or a ing earnings growt in su se-

quent years. Companies en eavour to eep

dividends relatively stable and only change

t em i a justments to ivi en payments

are justi ie in t e me ium term ue to a

correspon ing earnings tren . T ese assess-

ments by companies appear to be consist-

ent y correct.

econdly , earnings pass through a multi-

year cyc e. T e o serve corre ation etween

payout ratio an earnings growt may re ect

regu ar cyc ica return to average growt

rates. For example, a phase of high earnings is

c aracterise y a re ative y ow payout ratio:s mentione a ove, companies en eavour

o eep ivi en s re ative y sta e an con-

equently not every earnings increase results

in an equa y ig increase in ivi en s. I ,

on t e ot er an , a perio o ig earnings

growt o ows severa years o ower earnings

growth rates, an initially relatively low payout

ratio is an in icator o ower earnings growt

at cou e expecte in uture.

Thirdly , a high payout ratio indicates a moree icient use o resources: i companies is-

ri ute a ig proportion o t eir earnings an

re t ere ore compe e to o tain a re ative y

high proportion of financing costs externally

or new investments, t en investment pro-

ects wi e se ecte care u y, since t e cost

o capita is re ative y ig an en ers must



Dividend strategies

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C art 1 s ows t e corre ation etween t e

payout ratio an t e average rea earnings

growt in t e su sequent 10 years or t e

S&P 500. It s ou e note t at t e spi e

in t e payout time series in 2009 can e

exp aine y t e earnings s ump in t e S&P

500 ue to t e massive write-o s in t e an -ing sector. At 30 % t e payout ratio as even

a en to a new istorica ow in t e ast two

years, in t e wa e o t e genera y positive

earnings per ormance e ivere y US corpo-

rations.

I t e corre ation etween payout ratio

n earnings remains va i , it in icates ow

in ation-a juste earnings growt or t e

S&P 500 in t e coming years.

We ave examine t e corre ation etween

payout ratio an earnings or ot er mar ets,

oo, name y Europe, Japan an emerging mar-

ets. T e same a so app ies in t ose regions:

e ig er t e payout ratio, t e ig er t e

future earnings growth at index level.

so irsty e persua e t at t e project is a

via e proposition. On t e ot er an , compa-

ies t at retain a ig proportion o earnings

ay ten towar s ine icient use o resources,

ince t ere is no nee to pursue t e onerous

rocess o in ing externa en ers. Arnott

n Asness o in ee emonstrate t at peri-o s o ow payout ratios go an -in- an wit

ove-average investment ratios re ative to

gross omestic pro uct GDP . T ese invest-

ent ooms ave e u timate y to ai e an

excess investments an , consequent y, to ow

earnings rom a macro-economic perspec-

ive. T e est exampe is t e 1990s, w ic

ere mar e y over-investment in in orma-

ion tec no ogy IT an te ecommunications.

is resu te in t e recession in 2001. During

e mi ate 1990s t e payout ratio a a eno a recor ow an turne out to e a ea ing

in icator or ow earnings growt in t e su -

equen years.

et us summarise w at we ave esta is e

o far: the profitability of companies falls on

verage i a ig proportion o earnings is

etaine an rises i t e payout ratio is ig .

Payout ratioshifted forward b 10 ears, rhs

10-year real earnings growth (annualised, left-hand scale)

20 %

30 %

40 %

50 %

60 %

70 %

80 %

–8 %

–6 %

–4 %

–2 %

0 %

2 %

4 %

6 %

8 %

1 9 4 7

1 9 5 2

1 9 5 7

1 9 6 2

1 9 6 7

1 9 7 2

1 9 7 7

1 9 8 2

1 9 8 7

1 9 9 2

1 9 9 7

2 0 0 2

2 0 0 7

2 0 1 2

2 0 1 7

2 0 2 2

Chart 1: S&P 500 payout ratio vs. real earnings growth

ource: R. Shiller, Allianz Global Investors.Past performance is no guarantee of future results.



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What does this meanfor investors?

For equity investors, owever, t e crucia

actor is t e extent to w ic conc usions re at-

ing to investments can e rawn rom t ese

o servations.

T e corre ation etween equity prices an

earnings is on y extreme y wea over t e

s ort term. T is app ies ot to t e estimate

earnings or t e next 12 mont s an to t e

earnings most recent y reporte . It app ies in

a simi ar way to equity va uations ase on

t e previous year’s earnings or expecte earn-

ings or t e su sequent perio .

Longer-term earnings tren s are nonet e essre evant to per ormance. It is possi e to s ow

empirica y t at va uation parameters ase

on re ative y ong-term average earnings are

statistica y signi icant or exp aining onger-

term equity mar et tren s spanning severa

years (although not for relatively short-term

tren s .

It is a simi ar situation wit mu ti-year earn-

ings trends, both for past earnings trends and

or t ose expecte in uture.

C art 2 s ows t e corre ation etween t e

payout ratio o g o a equities as a ea ing

indicator of global accumulated earnings

growt .

Global earnings growth (5-year accumulated, lhs) Payout ratio (shifted forward by 5 years, rhs)

–50 %

0 %

50 %

100 %

150 %

200 %

30 %

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14848280

35 %

40 %

45 %

50 %

55 %

60 %

65 %

70 %

Chart 2: Global payout ratio vs. 5-year accumulated earnings growth

Source: Thomson Datastream, Allianz Global Investors.

Past per ormance is no guarantee o uture resu ts.



Dividend strategies

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C art 3 i ustrates t e corre ation etween t e

ayout ratio an g o a accumu ate equity

arket performance. We chose a lead time

o ive years or t e payout ratio in t e caseo ot c arts. As in t e case o US ata, t e

corre ation remains va i or a re ative y ong

en-year lead time.

n summary, we can ma e t e o owing state-

ents a out go a equity mar et tren s an

he payout ratio:

1. T e payout ratio as a ea ing in icator o

uture earnings is a so a ea ing in icator o

equity performance at global level.

2. T e price ecine on g o a equity mar ets

o a out 25 % in t e past ive years re ects

he low earnings environment of the last

ive years.

. Over t e next ive years, mo erate earnings

growth is expected: the worldwide payout

atio as risen mo erate y as a tren over

e past ive years, name y rom approx.

5 to 38 %. T is suggests a mo erate risein earnings in the coming five years, from

e en o 2011 to t e en o 2016. T e

pi e in t e payout ratio uring t is time

perio cou point at a major equity mar et

increase in 2013 14. A t oug t e tem-

porary rise in the payout ratio to almost

70 % can e exp aine y t e US mar et: in2009, earnings s umpe y a out 90 % as

consequence o write-o s at an s. For

his reason, the payout ratio is distorted, in

our view.

Regional outlook

W en we con uct t e a ove ana ysis at

regiona eve , we in t at t e out oo or

earnings an equity prices i ers signi icant y

in some cases.

In t e case o t e we conc u e, as s own

ove, t at t e me ium-term earnings out-

look and consequently the expected price

per ormance are mo est. Ana ysing t e

payout ratio is not t e on y way to come to

is conc usion. In cyc ica terms, earnings

re currently at a high level and significantly

ove t e tren . T e same app ies to margins.

As a resu t, it stan s to reason t at earnings

wi return to t e ong-term tren , particu ar ygainst the background of continuing high

eve s o commo ity prices an a sow- own

in t e g o a economy. Equity mar et vau-

5-year cumulative equity performance Payout ratio (shifted forward by 5 years, rhs)

86 88 90 92 94 96 98 00 02 04 06 08 10 12 148482

30 %

35 %

40 %

45 %

50 %

55 %

60 %

65 %

70 %

0 %

50 %

100 %

150 %

200 %

250 %

–50 %

Chart 3: Global payout ratio vs. 5-year accumulated equity performance

ource: Thomson Datastream, Allianz Global Investors.

Past performance is no uarantee of future results.



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ations a so support t e notion o a e ow-

average per ormance out oo . T e S i er

price-earnings ratio P E ratio , w ic is ase

on cyc e-a juste earnings ro ing 10 years ,

is current y ig er t an t e ong-term mean

– typica y in icating an expectation o e ow-

average pr ce ga ns.

In t e case o apan, too, we arrive at on y

a wea earnings pat in t e me ium term.

T e country continues to su er rom wea

omestic eman resu ting rom emo-

grap ic actors, ow in ation an imite

scope or passing on price rises.

In Europe on t e ot er an , we come to a

muc more positive picture C art 4 .

T e rise in t e payout ratio in t e past ive

years, rom a out 40 % to 45 %, ea s one to

conc u e t at equity per ormance wou e

positive as an average o t e next ew years.

For emerging mar ets, too, we expect t at

the next few years will see continued above-

verage earnings growt re ative to t e

g o a equity mar et: t e tren in t e payout

ratio re ative to t e eve ope mar ets as

increase urt er in recent years. In com-

parison wit t e past eca e, owever, t e

momentum wi ec ine somew at.

Decisive insights

T e payout ratio is an important actor in

equity mar et per ormance: t e ig er it is,

e etter t e expecte earnings tren an

e expecte equity mar et per ormance.

In ot er wor s, an investment strategy t at

ocuses on ig payout ratios an t ere ore

on a re ativey ig ivi en payment yie

is a e ensive growt strategy.

At present t e s ig t rise in t e wor wi e

payout ratio suggests a mo erate rise in

g o a equity in ices.

Stefan Hofrichter

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 1684828078767472

5 years cumulative equity performance Payout ratio (shifted forward by 5 years, rhs)

–50 % 35 %

0 %

50 %

100 %

150 %

200 %

250 %

40 %

45 %

50 %

55 %

60 %

65 %

70 %

75 %

80 %

Chart 4: European payout ratio vs. 5-year accumulated equity performance.

Source: T omson Datastream, A ianz Go a Investors.Past performance is no uarantee of future results.



Dividend strategies

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Do you know the other publications of CapitalMarket Analysis – the investment think tank?

Analysis & Trends

→ From emerging mar ets to growt mar ets

→ Brazi: Loca Hero – G o a Winner

→ Asia on t e move – gravitationa centre o t e 21st

century?

→ T e sixt Kon ratie – ong waves o prosperity

→ Outsmart yourse !

→ nvest ng n carce esources

→ Turning Point

→ Turning Point: 10 T eses on t e Rig t Way to Invest

over the Turning Point

→ C ina – Driving G o a Growt

→ Germany: G o a isation Winner

→ Eco- ogic: Investing in t e Environment

→ Are Ta eovers He ping Drive t e Equity Mar et

→ T e Renmin i internationa isation gains momentum

→ Tiger an Dragon

→ Fig ting in ationary pressure→ C ina‘s new age o growt

→ Decisive insig ts in a “C anging Wor ”

→ Demograp ic Turning Point Part 1

→ Pensions in a Demographic Transition (Part 2)

→ Demograp y as an Investment Opportunity Part 3

→ Demograp ics: From Turning Point to Investment

Opportunity

→ C ina Focus – “Har Lan ing”?

→ C ina Focus – C ina’s Concern: In ation

→ To go c ing a ?

PortfolioPractice

→ ustaina e – Responsi e – T eme strategies

→ T e new Zoo ogy o Investment Ris Management

→ Is sma eauti u ?

→ Focus: T e Omega Factor

→ ct ve anagement

→ B a c Swan

→ ustaina e Investing: just a a ?

→ Responsi e Investing reoa e

→ My name’s “Bond” – “Corporate Bond”

→ Financia assets in Germany

→ Divi en stoc s – an attractive a ition to a port o io

→ Fi uciary Management

→ Be aviora Finance an t e Post-Retirement Crisis

You can in a t e atest pu ications an po casts

of Capital Market Analysis under:

www.allianzgi.de / capitalmarketanalysis



11

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