Wall Street’s top equity strategists have been pushing “corporate cash return strategies” as the best way to play the stock market. These are strategies where companies return cash to shareholders in the forms of buybacks and dividends. Deutsche Bank’s David Bianco recently wrote a massive report on how share buybacks would cause EPS to surge. SocGen’s Dylan Grice and Bank of America’s Savita Subramanian both aggressively argue that high quality dividend growth strategies are best for the long run.
Adam Parker, Morgan Stanley’s top U.S. equity strategist also pushes the idea of moving into dividend stocks. Like Grice, he stresses how dividends historically account for the bulk of total returns. Like Subramanian, he notes that supply-demand dynamics bode well for dividend stocks.
Arguments for dividend growth typically emphasise 1) strong balance sheets and 2) track records of dividend growth.
However, no other report we’ve read points to this fascinating nugget that Parker unearthed: executive compensation trends. In short, it has become increasingly in the best interests of executives to boost dividend payouts thanks to the evolution of equity-based compensation.
What could cause payout ratios to increase? Perhaps it is the fact that 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 8). 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.
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