High Dividends for Aussies! Yeay?!!

[RichKid]

Alan Kohler says in this article that Australian stocks generally pay much higher amounts in dividends than US counterparts but are afraid to re-invest in the business for growth unlike their American counterparts- hence the spate of capital returns in recent months. Part of the reason appears to be the tax benefits we get here (dividend imputation). So Rozella, you're in the right country for your strategy!: http://www.smh.com.au/news/business/deequitising-is-all-the-go/2005/12/06/1133829595520.html Here's an excerpt, references to the move from equity to debt funding too:

....The other Australian wrinkle to the global theme of de-equitisation is the high dividend payout ratio in this country. AMP's Shane Oliver highlighted this recently when he showed that Australia's average payout ratio (dividend as a percentage of earnings) is 64 per cent, compared to a global average of 39 per cent and even less in the US (34 per cent) and Japan (31 per cent).

Oliver says that of the 12.4 per cent average annual return from Australian shares in the 105 years since 1900, just over half has been due to dividends, providing a stable anchor for investment returns. He used the stats to argue that high dividends tend to produce better company returns because they indicate that the reported earnings are real - that is, they have actual cash flow backing them, which Oliver says is especially relevant after Enron and HIH etc.

Anyway, this is really just another manifestation of the capital tussle between owners and managers that we are seeing at present.

Warren Buffett's success over half a century has been built on investing in companies that pay low or no dividends, for two reasons: dividends in the US are taxed and also attract transaction costs when you reinvest them. If you like a company and its management, says Buffett, then you can't do better than leave the money with them rather than take it away and look for something else to invest in.

In their hearts, institutional investors like Shane Oliver's employer no doubt think the cash is better in their hands than in those of overpaid, over-ambitious CEOs.

The trouble is that this is forcing managers to take on more debt. The global trend towards "de-equitisation" we are now seeing has haunting echoes of the great gearing up of the world's balance sheets that occurred during the 1980s, driven by Kohlberg Kravis Roberts, Michael Milken, Alan Bond, Christopher Skase and the rest.

That whooshing sound you can hear is the debt-to-equity pendulum swinging past.

 

[rozella]

G'day RichKid,

Good article.

"The lure of the dividend, gives a stock a reason to rise"........ I have traded this way now for 7 or 8 years, prior to that, I found it difficult to find a strategy that consistantly wins enough to make a living from.

 

[Knobby22]

Better dividends than buybacks for us small investors.

 

[drillinto]

More on de-equitisation of the markets:


"M & A and buy-backs shrink the London market by £64bn"

By Robert Orr
Published: March 10 2007 02:00 | Financial Times

The UK equity market shrank by a record £64bn last year amid a surge in mergers and acquisitions and share buy-backs.

That figure is the equivalent to 4.1 per cent of the London equity
market - double the rate of “de-equitisation” of 2005 and four times the figure for 2004.

Until recently, the pool of equity had tended to deepen over time as stock from new issues exceed the amount of being taken out of circulation.

However, this trend reversed three years ago and has accelerated since as a surge in cash takeovers has removed a host of quoted entities from the stockmarket.

The increasing use of financial engineering to gear up company balance sheets has also seen billions of pounds returned to shareholders via share buy-backs and special dividends.

Research from Citigroup showed that while almost £50bn of new equity was introduced to the UK market through initial public offerings and secondary issues last year, a record £115bn was “retired”.

Cash takeovers accounted for about £60bn of this, a rise of 80 per cent on 2005.

Takeovers completed last year included O{2,} the mobile phone company; BAA, the airports operator; BOC, an industrial gases group; and P&O, the ports and ferries company.

A further £56bn was taken out of circulation via share-buy-backs and the payment of special dividends. Redemptions of B shares by Vodafone retired £8.8bn last year. Other significant buy-backs included BP (£8.4bn), Royal Dutch Shell (£2.9bn), AstraZeneca (£2.2bn) and Anglo American (£2bn).

Hasan Tevfik, Citigroup strategist, said M&A would continue to drive de-equitisation as long as debt remained cheap in relation to equity.

He said: “It makes sense to use the bond market to invest in the equitiesmarket.

“The financing is much cheaper than the likely return on the equity [and] as long as the cost of capital remains low it is a positive environment for de-equitisation.”

Although de-equitisation is a global phenomenon, the UK markets has been more affected than others.

The 4.1 per cent figure for the UK is more than double the equivalent for the US and four times that of Europe.