High payout ratios for Australian companies are unsustainable, according to a new report from Boston Consulting, The Challenge of Growth: Our Perspective on the Growth versus Dividends Debate.
The report finds that payout ratios on earnings as dividends of 70% is 31% above the global average of 39%. At the same time, the report also shows that Australian earnings growth has lagged global growth by 15%.
But the authors, Nicholas Glenning, Ramesh Karnani, Alexander Just and Lee Sun, ask the question if Australian companies are too focused on investor requirements for yield and not enough on growth opportunities:
The high payout ratio has led to higher dividend yields which have been able to satisfy investor appetite for return. However, this raises the question of whether Australian companies are too focused on satisfying investors’ demand for yield and missing value accretive growth opportunities.
They note that “that is not an easy question to answer, as growth is a prerequisite for sustainable dividend yields”.
Framed as a response to recent comments from RBA governor Stevens that there is a lack of “animal spirits” in the Australian economy and business, the report says that:
Investors, and the Boards on their behalf, who need a more fiery risk appetite. For management, the solution is not linear, but rather based on a simultaneous optimisation of profitable growth (organic and through acquisitions), dividend yields (by understanding investors’ preferences), and capital structure.
Co-author Ramesh Karnani told the AFR that the growth-versus-dividend debate in Australia “has lost sight of the fact that growth is a prerequisite of sustainable dividend increases”.
He added that without growth payout ratios “cannot be sustained for long” and “only postpone an inevitable crunch”.
Time to fire up those animal spirits.
You can read the full report here