SOURCE: The Boston Consulting Group

The Boston Consulting Group

April 24, 2012 00:01 ET

Time to Focus on Yield as a Key Source of Shareholder Value, According to a New Survey

BCG Annual Investor Survey Suggests Investors Favor Companies With Strong Free-Cash-Flow-Yield and Want to See More of That Yield Returned to Shareholders in the Form of Dividends

BOSTON, MA--(Marketwire - Apr 24, 2012) - Investors are growing more pessimistic about the prospects of the global economy and global equities markets. As a result, they are embracing an old-fashioned approach to value creation: making the health of a company's free-cash-flow-yield their top investment criterion, according to a recent survey by The Boston Consulting Group.

The BCG Investor Survey

During the first quarter of 2012, BCG surveyed 165 portfolio managers and buy-side and sell-side analysts at investment companies who are collectively responsible for approximately $1.2 trillion in assets under management. The survey is the fourth in a series that BCG has been conducting since 2009 to probe investor views on the global economic environment and priorities for company value creation. The resulting article, "The BCG 2012 Investor Survey: Back to the Future -- Investors Refocus on Yield," breaks down the key findings:

  • Events ranging from the Japanese earthquake and tsunami to the ongoing fiscal crisis in the euro zone have made investors more pessimistic about economic growth. Indeed, a majority of respondents (57 percent) who focus on non-U.S. equities and about a third (32 percent) of those who focus on U.S. equities believed that a double-dip recession is either "highly likely" or "somewhat likely" in 2012.

  • As investors scaled back their expectations for growth, respondents have made a company's free-cash-flow-yield their top criterion for investment, moving up 12 percentage points from fifth place last year.

  • What's more, investors want to see more of that yield returned directly to shareholders in the form of increased dividends. Since our first survey in 2009, dividend increases as a priority for the use of excess cash have increased by 29 percentage points to become second only to investment in organic growth.

  • The euro crisis has also renewed investors' concerns about the health of company balance sheets. Respondents to our survey who follow European equities shifted decisively away from organic investment and M&A and toward building cash on the balance sheet as priorities for the use of excess cash.

Back to the Future

The findings of this year's survey suggest that the roughly 25-year period in which growth was the primary concern of investors may be coming to an end, replaced by a more traditional focus on yield.

"In the past few decades, capital appreciation accounted for the lion's share of total shareholder return [TSR]," said Jeff Kotzen, a senior partner in BCG's New York office and lead author of the study. "But a higher reliance on dividends happens to be a reversion to a longer-term historical trend. If you look at the composition of TSR at companies making up the S&P 500 from 1900 through 2011, dividend yield accounted for nearly half of total TSR."

"In a period of relatively modest TSR and relatively low stock-price appreciation, increasing dividend payout becomes an important way for companies to beat the market average," said Tim Nolan, a partner in BCG's New York office and co-author of the study. "One of our survey respondents put it this way: 'a big dividend yield is like running a 100-yard dash but getting to start at the 40-yard line.'"

Significant dividend increases that are sustained over time also often strengthen a company's market valuation, a major reason why these investors also preferred to see free-cash-flow distribution in the form of dividends rather than share buybacks. The majority of respondents (69 percent) said that companies do an extremely poor job of timing their share repurchases. "The strong preference of investors for dividends over buybacks helps explain why BCG research has consistently shown that dividend increases have a more positive impact on a company's valuation multiple than do share buybacks," said Frank Plaschke, a partner in BCG's Munich office and a co-author of the study.

A copy of the report can be downloaded at

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or

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