There has been a bit of media commentary lately, and from...

There has been a bit of media commentary lately, and from analysts I respect, that equities in general are overvalued due to ‘yield hungry’ investors pushing up share prices and that future interest rate rises will reverse this trend. The inference is that companies are unsustainably boosting dividends, thus leading to yet higher share prices. Gains over the past few years are said to relate to PE expansion from yield chasers rather than earnings growth. There is even a suggestion that companies are employing this strategy of increasing dividends in preference to reinvesting in their own business which will lead to an earnings growth hole in the near future. In this criticism there is an assumption that the companies will be able to employ the capital being distributed as dividends at an acceptable return. It is of course imperative that well run companies should return capital to shareholders if it can’t be better utilised by the company. Goodness knows how many have destroyed value trying to invent growth where dividends could have been paid!
Anecdotally I would agree with the market commentary. These words do indeed make sense but has anyone quantified this? I have had a quick look at my 22 years of data for the CBA which has certainly had a very good share price run over the last few years. Clearly with such good dividend and earnings consistency, and having the reputation as the highest quality of blue chip company, CBA is the obvious choice for yield hungry investors to flock to. So what we should see of course is the payout ratio (proportion of earnings paid as dividends) increasing as the board succumbs to shareholder demands. Not at CBA, interestingly the average payout ratio over the 22 years is 77.5%. In the latest year the ratio is 76%, and in the last 9 years it has ranged between 73% and 78%.
CBA yield slipped slightly, from a mean yield of 6% (15 year average) to around 5% now. This should be expected in a falling interest rate environment. But at <5% in 2000 and 2001 we couldn’t claim that a low yield is indicative of a lower future share price. CBA shows a strong track record of increasing earnings and lifting dividends. In the 22 years I have tracked it the company has performed quite nicely despite many adversities, market wide and industry specific. Dividends have grown in 21 of the 22 years, in 5 of those 22 years earnings fell. If commentators are right we will see a real estate pullback and a change in the interest rate environment, these have to happen at some time. Analysts expect that in this scenario share prices, particularly for banks will fall significantly. CBA at least has shown it will be able to maintain its payout ratio and even increase it if that proves a worthy use of capital. They certainly haven’t sacrificed their long term growth for the short term satisfaction of the market. Perhaps CBA is not one of the companies that commentators are referring to?