A comparison of earnings yields on shares and interest on bonds underlines the attractiveness of shares. Dividend yields in almost all developed markets are currently above interest rates on one-year money market investments. According to US market data from the economist Robert Shiller, the opposite was true for more than 40 years prior to 2008.
Corporate strength
Although the difference normalised to some extent last year, we do not expect the difference to narrow further. Bond markets have already priced in a future tightening of monetary policy and are not likely to react further to increases in short-term interest rates.
Company sales and profits have increased sharply. To date, nearly 2,400 of more than 4,500 companies have announced their figures for the 2013 financial year. Earnings growth in the Bloomberg World Index has been almost 7%. Financial stocks led with growth of 25%, followed by the manufacturers of discretionary consumer goods (17%) and public utilities (15%). We expect dividend yields will continue to rise. The dividend yield for the MSCI World Index is currently around 2.4% but this does not account for the boost provided by share buyback programmes.
A key factor in investment returns is not just the dividend but the total payout ratio into which the share buyback programmes flow. In the long term, these make up about half the total return in global stock markets.
Cash to start to flow
Companies with high total distributions tend to outperform and the capital available for such purposes has increased sharply in the past few years. The cash reserves of the 1,000 largest companies have grown from about $1trn to almost $2.8trn since 2008. Some of this capital will inevitably flow back to shareholders.
Apple marked the start of a new buyback cycle with its multi-billion-dollar share buyback programme. Buyback programmes currently make up around 30% of the total payout ratio but historically this is very low; we believe that the number of share buyback programmes will increase significantly.
We expect the major oil companies and giants in the IT sector, such as Microsoft, Qualcomm, Google and Cisco, which all have large cash reserves, to launch buyback programmes.
