Opportunities lie outside ASX20
Dividend returns from Australia's top 20 listed businesses, averaging 82.5 per cent of revenue will prevent them from delivering substantial growth, a fund manager believes.
Henderson Global Investors head of Australian Equities, Lee Mickelburough, told attendees at the fund manager's Knowledge Shared event in Sydney last week, that growth in the Australian Securities Exchange's (ASX's) top 20 firms would trail the broader market.
"The top 20 stocks in the market are the household names, these stocks have been very good performers for a long period of time… A great basket of stocks," he said.
"But one important thing to note is that in this low interest rate world what has happened to pay-out ratios.
"When I started in the market, companies would typically pay-out 50 per cent of their earnings in dividends, and retain the other 50 per cent and try to grow the business.
"What's happened in this thirst for yield, we've seen the pay-out ratio climb to 82.5 per cent [among the ASX20], so companies have been rewarded for that, share prices have rallied substantially, investors are looking for that dividend yield, but it's hard to see how this group of companies can grow substantially with such a low retention of capital.
"This basket of stocks we've got growing over the next three years [at] around five per cent, [while] the broader market we think is [going to be] over seven per cent, and our portfolio is close to 12 per cent growth, so there is certainly a lot more opportunity outside this basket of stocks."
AUTHOR
Nicholas O'Donoghue
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