CONTRIBUTORS
Lauren DeMore, CFA
Portfolio Manager
Value Strategies
Darren A. Jaroch, CFA
Portfolio Manager
Value Strategies
When evaluating businesses for our portfolios, a key goal is determining a company’s value to its shareholders. There are many ways to measure this, such as the distribution of excess profits to shareholders in the form of dividends. Dividends can offer investors a sense of near-term dependability, and may be viewed as more reliable than gains in stock prices.
Many companies commit to paying a quarterly dividend and work hard to follow through on the commitment. However, sometimes businesses aim too high with their dividends. Discerning whether a dividend is solid—or might even grow—takes skill and research. It also helps avoid disappointments, as businesses can cut or suspend their dividends at will.
In fact, companies intending to pay the highest dividends tend to be more prone to disappointment. If you rank large companies by their dividend plans, you find that the firms in the top 10% tend to have the highest share of letdowns.1 In our view, it’s better to focus on companies that are positioned to increase their dividends.
Why we focus on income growers
The success of our investment strategy is not as simple as finding the highest dividend yields. We tend to favor companies that are income growers. We evaluate dividends in the framework of a company’s overall financial picture, including how its executive leadership stewards company cash. While paying out dividends might make sense for some firms, we also look for those that are deploying cash in ways that could lead to stronger earnings growth or dividend distributions in the future. A business that has dividend upside, in our view, is managing itself for further growth and is thinking creatively about ways to add shareholder value.
We believe focusing on income growers helps us identify businesses with more robust growth profiles. Companies with the ability to grow income, in many cases, also successfully grow earnings and revenue. Stocks with these qualities, in our view, are more resilient when value is out of favor and growth leads markets.
Income growers had better growth characteristics than dividend yielders
Average income, earnings, and revenue growth, 1990–2024
Source: Putnam. Income growers are stocks in the Russell 1000 Index that rank in the top 50% for five-year total income growth and profitability and that pay annual dividends above a rate of 0.25%. The dividend yielders are stocks in the Russell 1000 Index that rank in the top 25% for dividend yield. Income growth includes both dividends and stock buybacks. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
Share buybacks: Another sign of shareholder value
Companies reward shareholders in many ways besides dividends. Share repurchases are an example. Repurchases have the effect of lifting income per share. In fact, repeated rounds of buybacks can mean increasing dividend income for shareholders, even if a company continues to pay out the same amount in dividends. Such companies can become income growers.
Since the 1990s, companies have increasingly rewarded shareholders more by repurchasing shares than paying larger dividends. Among large companies in the Russell 1000 Index, dividend yields have declined, but total yields—dividends plus stock repurchases—have increased.
Share buybacks have helped lift total yield relative to dividends
Average yields for companies in the Russell 1000 Index
Source: Putnam. Share yield is the net issuance—purchase of shares in a year divided by the shares outstanding at the start of the year. A negative value means the company is issuing shares and thus causing earnings per share to decrease. A positive value results from buying back shares and increasing the earnings available per share.
As value investors, we also seek companies that are undergoing substantial positive internal or external change. With this research, we look beyond traditional value metrics to find opportunities across the value universe. For example, we have flexibility to measure value in ways that are sector-specific and even company-specific. We use different valuation methodologies based on each company’s industry or business model.
Endnotes
1Source: Putnam research. Based on analysis of dividend-paying companies in the Russell 1000 Index and their indicated dividend yields, 1990–2021.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization companies may fall out of favor with investors based on market and economic conditions.
Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.
Distributions are not guaranteed and are subject to change. Yields may be affected by changes in interest rates and changes in credit ratings.
Active management does not ensure gains or protect against market declines.
IMPORTANT LEGAL INFORMATION
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Please visit www.franklinresources.com to be directed to your local Franklin Templeton website.