Abstract
Conventional wisdom posits that the payment of dividends will decrease the funds available to finance growth, and will therefore lead to lower future earnings growth. This belief was challenged in recent years with research that tested the relationship between dividend payout and future earnings growth, both on the individual company level and aggregate market level in different countries. Recent results contradict popular belief, and show that companies with high payout ratios tend to realise stronger future earnings growth.This study investigated the same relationship in South Africa, as an example of a developing country, using a large sample of 12,669 company-years over the period 1973 to 2009. The results fully support recent findings that dividend payouts precede higher future earnings growth.
Highlights
Conventional wisdom postulates that high dividend payout ratios will negatively affect future earnings since they reduce the cash available to fund further growth opportunities
All three figures show a positive relationship between the two variables, providing an initial indication that results may compare very well with the study done in the United States of America (USA) by Zhou and Ruland (2006)
There are some limitations in comparing the results of the USA and Australian study with this South African study
Summary
Conventional wisdom postulates that high dividend payout ratios will negatively affect future earnings since they reduce the cash available to fund further growth opportunities If companies retain their realised profits, instead of paying them out to shareholders in the form of dividends, they could reinvest the realised profits in their current business activities, or new business ventures, and realise even higher profits. Their results confirmed that there was a positive relationship between dividend payout and future earnings growth Both studies were done in the USA using companies that operate primarily in a developed economy. The obvious and very relevant question arises as to whether the results are the same for companies operating in a developing economy, such as South Africa This current study explores the relationship between dividend payout and future earnings growth for listed South African companies.
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