Corporate Insights Dividends: When they matter and when they don’t

Dividends: When they matter and when they don’t

(3rd Quarter 2017)

Themes

  • Schools of thought on dividends: The good, the bad, and the indifferent
  • Dividends in the real world
  • What is the relationship between dividends and growth?
  • Should you align your dividend policy with your peers or sector?
  • What influences investor preferences for dividends?

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Introduction

Over the last two decades, the way companies allocate capital has meaningfully evolved. Twenty years ago, the percentage of capital being returned to shareholders was low – approximately 13% of total capital deployed, as shown below in Exhibit 1. Today, the amount of capital companies are returning to shareholders has more than doubled. In 2016, $408bn of corporate cash for companies in the US and Europe went to buying back shares and $552bn went towards dividends, meaning a whopping $960bn of total capital from public companies flowed back to investors. This compares to a mere $100bn twenty years ago.

We have written before about the – perhaps surprising – value that the current market ascribes to growth. So it is a bit of a puzzle as to why returning capital to shareholders remains so attractive relative to business investment.

Paying back your shareholders can of course be done via share buybacks or dividend distributions, although there are many differences between the two approaches. Both share buybacks and special dividends tend to be one-time events, whereas a dividend program tends to be more fixed and more

Capital deployment 20 years ago Capital deployment today representative of an ongoing corporate policy – which we can assess and compare to other policy choices. Dividends have represented a significant portion of the way companies return capital to shareholders, accounting for more than half of the total spending allocated to buybacks and dividends. This paper, the eighth in our ongoing series of Credit Suisse Corporate Insights, focuses on dividends, evaluating the impact of dividends on valuation and investor perceptions and whether dividends can be considered a strategic lever for management to drive value creation.

  1. Sample includes over 2,100 companies in US (S&P 1500) and Europe (STOXX Europe 600). Organic growth is defined as capital expenditures + R&D expense + advertising expense + increase in rental expense. M&A is defined as capital invested in acquisitions net of divestitures. Share buybacks is defined as capital used to repurchase shares net of any additional equity issuance. Dividends include only cash dividends distributed. Other is defined as balance sheet strengthening.