UnThreaded | Threaded | Whole Thread (8) | Ignore Thread Prev | Next
Author: tjscott0 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8883  
Subject: Re: The 'sweet spot' in payout ratios Date: 2/2/2013 9:43 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 7
A contrary study by Robert Arnott & Clifford Asness done in Dec 2001.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=295974

You can download a pdf paper here free.

Conclusion:

Unlike the implications of the intertemporal interpretation of the Miller and Modigliani model, and unlike optimistic “new paradigm” advocates, we find that low payout ratios (high retention rates) historically precede low earnings growth. Furthermore, this relationship is statistically strong and seems quite robust. We find the empirical facts conform to a world in which managers possess private information that causes them to pay out a large share of the earnings when they are optimistic, and a small share when they are pessimistic, so that they can be confident that they can maintain these payouts. Alternatively, the facts also fit a world in which low payout ratios lead to inefficient empire building, the funding of less-than-ideal projects and investments, leading to poor subsequent growth, while high payout ratios lead to more carefully chosen projects with relatively high returns.

At this point, these explanations are conjecture, and more work on discriminating among competing explanations is appropriate.
But, the positive link between payout ratios and subsequent earnings growth appears to be empirical fact, not conjecture.

In a nutshell high payouts=high future earnings.
Which means in my mind stocks with consistently increasing dividends trumps any payout ratio. Though one shouldn't follow that rule blindly. An exception PBI. Pitney Bowes is in a dying business. Though it has a history of increasing dividends over the past 30 years, investors recognize its service & products are heade for the dustbin just like buggy whips. A double digit dividend does not make up for the poor stock performance.

Good fortune to one & all.
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (8) | Ignore Thread Prev | Next

Announcements

Motley Fool Income Investor
Are you a dividend-savvy investor? Check out our Income Investor newsletter.
Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Macro Economics

Russia Collapsing Again?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement