Net Cash Disbursements to Equity Holders: Implications for Stock Return Predictability and Long-Horizon Consumption and Portfolio Decisions

Abstract

Dividends represent only one facet of cash flows between firms and shareholders. This paper compares the forecasting power of alternative financial ratios for stock returns and cash flow growth. We focus on the predictive content of issuance activity, both separately and when incorporated within a net payout yield. Inference is sensitive to the sample period examined, due to extraordinary stock issuance around the Great Depression. Post-Great Depression, we find little evidence that the issuance yield forecasts stock returns, but strong evidence that this yield forecasts future issuance growth. The net payout yield forecasts both stock returns and growth in net payout. The evidence is ambiguous regarding whether the net payout yield provides more accurate return forecasts relative to the total payout yield or dividend yield. We show that the particular choice of yield matters economically in the context of long-horizon consumption and portfolio decisions.