The corporate sector will change the way it views dividends and put more cash into growth, it is claimed

News - Banking

Written by Ray Clancy

Friday, 15 October 2010 08:07

Corporate managers are expected to change their investment habits and put more cash towards growth rather than dividend distribution, according to new research.

Standard Life Investments, a leading investment house, believes that the corporate sector will remain the strongest part of the world economy in the years ahead.

Company managers in an effort to maintain this strength will alter their behaviour by deploying more of their accrued cash towards growth rather than dividend distribution policies, it says.

‘Our analysis shows that investor behaviour is already altering and the corporate sector may be in the process of changing the way it views dividends,’ said Richard Batty, Global Investment Strategist at Standard Life Investments.

‘In recent years, managers were keen to show their companies had financial strength, typically shown by accruing cash and then distributing this as a dividend or a share buy back. Now a new environment may be starting to appear. Investors have recently been more willing to reward companies that embark on growth strategies, and management are taking note,’ he said.

‘One reason for this is that dividend yields are already high relative to the low yields from bonds or cash, mitigating the need to distribute high cash balances and raise the dividend further. In addition, the corporate signalling mechanism may be changing, rewarding companies that are able both to sustain current dividend distribution policies and to embark on a variety of growth strategies, such as spending on productive M&A or capital investment,’ he explained.

‘As far as investors are concerned, there are signs that they increasingly view equities as a way to access income, or high yields, rather than to rely on future capital growth as a chief driver of total returns,’ he added.

The research also shows that the real returns available to investors have typically been mainly earned from the initial dividend yield plus the real growth in dividends, with the rest of equity return coming from a re-rating of the asset class. ‘This approach is in line with the sustainable yield approach which we have favoured for some time in our asset allocation recommendations,’ said Batty.