Aberdeen Asset Management predicts the current investment environment will eventuate in yield becoming as important within equities as it is within the bond market.
Volatility across global share markets has made earnings difficult to predict, resulting in the price earnings ratio being a less relevant indication to astute investors than a company’s dividend policy.
Aberdeen managing director Hugh Young said a company’s dividend policy “better indicates a company’s true value and long-term performance”.
“A company can do one (or a combination) of four things with the cash generated by its operations: keep it (reduce gearing), spend it (on fixed assets), pass it to shareholders (as dividends), or reduce capital (through share buybacks),” said
Young said his confidence in dividend payouts as an investment indicator is backed by a study by Robert Arnott and Cliff Asness entitled, ‘Surprise! Higher dividends = higher earnings growth’.
This study of 130 years of data found that the higher the payout ratio, the higher the earnings growth in the subsequent 10 years, a finding that flew in the face of accepted wisdom, he said.
