19 November 2019 Nordea Markets and Corporate & Investment Banking How to pay it out Keep the money in the company, or pay it out? In theory, a company should invest in all available profitable projects, and its shareholders should prioritise and appreciate the likely increase in the company's value this will drive. In reality, some investors need a cash yield, and there can be powerful signal values from paying an ordinary dividend. Investors can also appreciate the governance aspect of companies making extraordinary (one-off) payouts to shed excess cash for which they have no use. Share buybacks are rewarded with share price outperformance - if you keep them up Ordinary dividends are the most straightforward and common way of paying out funds to shareholders, but they give only a marginal positive effect on share price performance. Our analysis shows that the top dividend payers in the STOXX600 Europe and STOXX600 North America outperformed the index by 10-20% in 2008-18, while those who bought back the most shares and did so continuously for at least three years, outperformed by 50-70%. Use of open market share buybacks has its limits While potential share price outperformance makes a compelling case for a major use of share buybacks for payouts to shareholders, our analysis shows that regulatory limitations on buyback volumes mean that open market buybacks may not be a potential full substitute for dividends for many Nordic companies. To be able to pay out more capital to shareholders, they may need to use different buyback methods, like a tender offer or Dutch auction, or add other payout methods like an extraordinary dividend or share redemption. The US has higher payouts than the rest of the world, and makes greater use of buybacks In 2005-18, US-listed companies paid out on average just over 5% of their market cap annually to shareholders. Europe is just below 5%, the Nordic region is at 4.5%, and Asia is at 2.5%. The US is also by far the biggest user of share buybacks, which account for ~60% of payouts, versus ~20-30% for Europe, Asia and the Nordics, with the Nordics lowest of all. US companies have paid out 93% of their free cash flow generated in the period, versus 71-75% in the other regions. We believe a key reason for the popularity of share buybacks in the US is the abundance of equity-based management incentive programmes, with earnings per share as a KPI which can be boosted by buybacks. How do I know which payout options are best for my company? There is not a compelling case for paying out big dividends to get a major boost to the company's share price, but there can be other strong reasons for doing it, like key shareholders needing a cash return or signalling quality and financial stability. Big share buybacks can give a serious boost to the equity value, but not if they are a one-off. They need to be recurring and hence also built into forward expectations – only then does the reward show. Each company should consider its expected capital needs and cash generation and the preferences of its major shareholders, weigh pros and cons, and select the mix of payout options that is optimal for their specific situation. Views on payouts from the business and academic worlds We have interviewed Anders Boyer , CFO of Copenhagen-listed jewellery group Pandora, Anders Jernhall , CFO of Stockholm-listed forestry and paper group Holmen, and Eva Liljeblom , professor of finance at Helsinki's Hanken School of Economics, for their views regarding corporate payouts to shareholders. 1
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