Finding value in companies that invest
For some time, Ralton has been concerned about distortions in the way corporates elect to invest capital. Specifically, we would highlight the rise in dividend payout ratios from the listed market and how these have been maintained at historical highs.
So, what have been the drivers? Shareholders who are increasingly hungry for yield and boards and management that seem happy to acquiesce.
In spite of slowing earnings growth and a low-rate environment, corporate payout ratios have continued to rise reaching arguably unsustainable levels. Combined with a lack of ‘animal spirits’ and the associated risks of investment, companies and boards have chosen dividend payments and capital management over investing for growth - in the medium term we see clear 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 have elected to invest for future profits.
As long-term investors, we seek out those companies with quality management teams who are investing in new ideas, products and industries to create future earnings streams with our investment in Brambles (BXB), Graincorp (GNC) and Orora (ORA) supporting our investment thesis.
View the February 2016 performance reports: