A loss of trust and the quiet revolution in corporate governance
Commentators and analysts continue to be vocal critics of the insatiable appetite for income that investors have developed in recent years. The argument goes that this trend has encouraged companies to return capital back to shareholders in the form of higher dividends and buy-backs, at the expense of investing for future growth. Thus, companies are apparently foregoing valuable growth opportunities stemming from investors' short-termism. Although record low interest rates have contributed to the 'reach for yield' in financial markets, this post argues that investors' loss of trust in CEOs' ability to undertake value accretive projects and acquisitions has had an important influence on corporate payout policies. Moreover, the greater propensity for companies to return capital back to shareholders has been far more powerful in reducing agency costs than the noise created by the bloated ESG industry. I develop a framework for identifying stocks with unsustainably high payout ratios (JBH, MND) and unsustainably low payout ratios (AGK and ASX). (VIEW LINK)