Since 1930, dividends have accounted for 42 per cent of stock market investment returns.
With bond yields near historic lows, dividend paying stocks have become increasingly popular in recent years.
Typically, a company will pay out a regularly growing dividend if it has a healthy balance sheet and a long track record of dividend growth.
But the decision to pay out a dividend may not be driven only by things like optimal capital budgeting and maximizing shareholder wealth.
You also have to consider conflicts of interest.
In a new note, Morgan Stanley’s Adam Parker discusses what companies are doing with their over $1.5 trillion worth of cash on their balance sheets.
Regarding dividends, Parker notes that the evolution of compensation packages could impact how these decisions are made:
Management teams are paying themselves more in restricted stock units (RSUs) than in options. In recent years, more CEOs of S&P 500 companies have received compensation in the form of restricted stock than as options (Exhibit 14). It is important that fundamental analysts understand how the senior management teams of the companies they are analysing are variably compensated, as those with restricted stock and not options are much more likely to increase dividends. The principle? People rarely intentionally damage their own net worth.
It’s a bit ironic. Equity-based compensation was designed to align executives’ interests with shareholders. However, we have to wonder if corporate decision-makers will pass up better uses of cash to enrich themselves in the form of dividends.
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