10Lun
I always ask myself what the advantage is of looking at dividend growth instead of looking directly at profit growth? Without growing profits, no growing dividend? The dividend is more or less the same, only additionally distorted by the payout ratio?
If the company starts with a low dividend (e.g. 0.5%) and a low payout ratio, it can increase the dividend above average for a few years, but at some point it is ultimately limited by profits and their development. Take Amgen as an example:
Payout ratio
Currently 65.08 %
Average 5 years 54.87
Average 10 years 46.32 %
Here you can see that the stable or rising dividend has to be paid by an ever larger proportion of the profit. This is not a trend that should or can continue forever.
I look forward to your view on this!
If the company starts with a low dividend (e.g. 0.5%) and a low payout ratio, it can increase the dividend above average for a few years, but at some point it is ultimately limited by profits and their development. Take Amgen as an example:
Payout ratio
Currently 65.08 %
Average 5 years 54.87
Average 10 years 46.32 %
Here you can see that the stable or rising dividend has to be paid by an ever larger proportion of the profit. This is not a trend that should or can continue forever.
I look forward to your view on this!
•
11
•
10Lun
@Kluuus Profits can fluctuate strongly in the short term, while dividends are less volatile due to the variability of the payout ratio. A clear trend - quasi profit growth adjusted for fluctuations - and the management's expectations for future profit growth can be better recognized in the dividend development.
Of course, it may also be the case that dividends rise faster than profits for a while and the payout ratio is increased. However, this is usually a temporary situation, as the management knows the "natural limit" and either adjusts the increases accordingly or expects stronger profit growth again in the future.
There are also some companies that increase their dividends sharply over long periods of time without significantly increasing the payout ratio. In these cases, the dividend is a simple indicator of profit growth.
When I analyze stocks, I usually still look at earnings and many other key figures (especially free cash flow). But that was not the aim here.
Of course, it may also be the case that dividends rise faster than profits for a while and the payout ratio is increased. However, this is usually a temporary situation, as the management knows the "natural limit" and either adjusts the increases accordingly or expects stronger profit growth again in the future.
There are also some companies that increase their dividends sharply over long periods of time without significantly increasing the payout ratio. In these cases, the dividend is a simple indicator of profit growth.
When I analyze stocks, I usually still look at earnings and many other key figures (especially free cash flow). But that was not the aim here.
••