The Impact of Cash, Dividends and Buybacks on Equities
We’ve documented whether or not, in recent decades, earnings have come to matter more for explaining equity performance, than ordinary, regularly-paid cash dividends. We’ve also stressed recently that growth rates in both U.S. profits and dividends have stagnated, which potentially jeopardizes equity gains.1 It’s possible, of course, for equities to gain a lot, even though profits don’t, because of P/E multiple expansion, but higher valuations usually reflect expectations of faster growth in future profits and/or lower discount (interest) rates.
Here we consider promised policy rate hikes by the Fed and examine price- and earnings-based measures and relationships during the past three quarter-centuries (with and without the unusual years of 2008-2009). We list the 4 chief reasons why U.S. firms have typically chosen equity share repurchases, and we examine the most recent 4 decades of evidence on dividends, buybacks and equity performance (including changes in repatriation taxes and yield curve structures). It’s one thing to examine and plot this data and relate variables contemporaneously, but can investment managers make some practical, actionable use of the history? Can any of it be reliably forecasted? If so, can equities continue gaining if profits continue stagnating while interest rates continue rising? Might a lower repatriation tax fuel equity gains? The hard evidence and findings in this report enable us to answer each of these crucial questions.