Finding value in companies that invest

For some time, Ralton has been concerned about distortions in the way corporates elect to invest capital. Specifically, the rise in dividend payout ratios and how these have been maintained at historical highs. What have been the drivers? Shareholders increasingly hungry for yield and companies that seem happy to acquiesce. In spite of slowing earnings growth and a low-rate environment, payout ratios have continued to rise reaching arguably unsustainable levels. Combined with a lack of ‘animal spirits’ and the associated investment risks, companies have chosen dividend payments and capital management over investing for growth - in the medium term we see risks for corporates who have consistently failed to invest, either in growth projects, or perhaps more fatally, not sufficiently maintaining their assets. With many loathe to cut dividends in favour of meeting shorter-term shareholder demands, companies’ lack of reinvestment places their long-term profits at risk. As such, we have been supportive of companies that have been going against the grain and elected to invest for future profits, with our investment in Brambles, Graincorp and Orora supporting our thesis. (VIEW LINK)