Tilting for yield and the bath analogy

[dealtn]

Free cashflow is forecast, just not as easy to find.

Sorry, you are simply wrong. I know. I used to make company forecasts for a living and no one did it for all the reasons I explained before.

Well I used to receive them. I think you need to revise your "no-one".

Maybe you are confusing Company paid for research freely available and distributed with customer commissioned and paid for research from financial analysts?

[OhNoNotimAgain]

Dividends by themselves are poor predictors of the future, or of company valuations. were it not so you could double a company's value by doubling the dividend.

And conversely, according to Ohno, a company that pays no dividend has zero value and potential to give returns.

Bad news for Berkshire, Google and Amazon, I guess.

As Stephen Pinker says says the anecdote is a tried and trusted way of sending a very powerful but misleading message. It is is much easier to digest than a detailed, analytical study of all the data such as the Barclays Study.

But do you agree with my assertion that your approach would apply a zero weight to any and every company that does not pay a dividend?

Yep, that's the way the index works and you can see the results.

[OhNoNotimAgain]

Free cashflow is forecast, just not as easy to find.

Sorry, you are simply wrong. I know. I used to make company forecasts for a living and no one did it for all the reasons I explained before.

Well I used to receive them. I think you need to revise your "no-one".

Maybe you are confusing Company paid for research freely available and distributed with customer commissioned and paid for research from financial analysts?

No, I am talking about the data collected and collated by Bloomberg and Reuters and made available to their clients.

[dealtn]

Free cashflow is forecast, just not as easy to find.

Sorry, you are simply wrong. I know. I used to make company forecasts for a living and no one did it for all the reasons I explained before.

Well I used to receive them. I think you need to revise your "no-one".

Maybe you are confusing Company paid for research freely available and distributed with customer commissioned and paid for research from financial analysts?

No, I am talking about the data collected and collated by Bloomberg and Reuters and made available to their clients.

So you have changed from

analysts don't publish forecasts of operating cash flow

to

News agencies don't provide those forecasts of operating cash flow to news agency subscribers...

[Lootman]

Dividends by themselves are poor predictors of the future, or of company valuations. were it not so you could double a company's value by doubling the dividend.

And conversely, according to Ohno, a company that pays no dividend has zero value and potential to give returns.

Bad news for Berkshire, Google and Amazon, I guess.

As Stephen Pinker says says the anecdote is a tried and trusted way of sending a very powerful but misleading message. It is is much easier to digest than a detailed, analytical study of all the data such as the Barclays Study.

But do you agree with my assertion that your approach would apply a zero weight to any and every company that does not pay a dividend?

Yep, that's the way the index works and you can see the results.

Yes, I see the results - 4th quartile over the last decade according to the latest fund factsheet.

The under-performance would be even greater if compared to a global index for that period.

[OhNoNotimAgain]

Free cashflow is forecast, just not as easy to find.

Sorry, you are simply wrong. I know. I used to make company forecasts for a living and no one did it for all the reasons I explained before.

Well I used to receive them. I think you need to revise your "no-one".

Maybe you are confusing Company paid for research freely available and distributed with customer commissioned and paid for research from financial analysts?

No, I am talking about the data collected and collated by Bloomberg and Reuters and made available to their clients.

So you have changed from

analysts don't publish forecasts of operating cash flow

to

News agencies don't provide those forecasts of operating cash flow to news agency subscribers...

You miss the point, analysts didn't generate them because they were so subjective and irrelevant.

[88V8]

A key flaw with all studies involving dividend reinvestment is that they assume the dividends are available for reinvestment, gross.
In most cases they are not. My marginal rate is 33.75%.
Studies that disregard the reality of being a PI, are in my view, unlikely to be worth reading.

As an an experienced investor you will know that all such studies are gross. You can't do them over half a century adjusting tax rates every time they change and for all different types of investors.

I agree.
All gross.
Which makes them all misleading.

Not disputing the merits and compounding effects of dividend reinvestment, it's just that the studies unavoidably exaggerate the effect.

V8

[dealtn]

Sorry, you are simply wrong. I know. I used to make company forecasts for a living and no one did it for all the reasons I explained before.

Well I used to receive them. I think you need to revise your "no-one".

Maybe you are confusing Company paid for research freely available and distributed with customer commissioned and paid for research from financial analysts?

No, I am talking about the data collected and collated by Bloomberg and Reuters and made available to their clients.

So you have changed from

analysts don't publish forecasts of operating cash flow

to

News agencies don't provide those forecasts of operating cash flow to news agency subscribers...

You miss the point, analysts didn't generate them because they were so subjective and irrelevant.

No you miss the point!

They do generate them and aren't irrelevant. Cashflows and earnings generate the ability to pay those dividends. Can you stop digging your hole of denial and accept they are generated. they do exist, and some find them useful. I have no issue with you choosing your own investment path and strategy but why are you so keen to deny others their alternative routes?

Falsehoods are there to be called out.

[OhNoNotimAgain]

Well I used to receive them. I think you need to revise your "no-one".

Maybe you are confusing Company paid for research freely available and distributed with customer commissioned and paid for research from financial analysts?

No, I am talking about the data collected and collated by Bloomberg and Reuters and made available to their clients.

So you have changed from

analysts don't publish forecasts of operating cash flow

to

News agencies don't provide those forecasts of operating cash flow to news agency subscribers...

You miss the point, analysts didn't generate them because they were so subjective and irrelevant.

No you miss the point!

They do generate them and aren't irrelevant. Cashflows and earnings generate the ability to pay those dividends. Can you stop digging your hole of denial and accept they are generated. they do exist, and some find them useful. I have no issue with you choosing your own investment path and strategy but why are you so keen to deny others their alternative routes?

Falsehoods are there to be called out.

BP's operating cash flow changed by 100% from 2020 to 2021, HSBCs changed by a factor of 5 from 2019 to 2021. It is a highly volatile series and is no use for portfolio construction and agencies do not request or publish them.

[dealtn]

No, I am talking about the data collected and collated by Bloomberg and Reuters and made available to their clients.

So you have changed from

analysts don't publish forecasts of operating cash flow

to

News agencies don't provide those forecasts of operating cash flow to news agency subscribers...

You miss the point, analysts didn't generate them because they were so subjective and irrelevant.

No you miss the point!

They do generate them and aren't irrelevant. Cashflows and earnings generate the ability to pay those dividends. Can you stop digging your hole of denial and accept they are generated. they do exist, and some find them useful. I have no issue with you choosing your own investment path and strategy but why are you so keen to deny others their alternative routes?

Falsehoods are there to be called out.

BP's operating cash flow changed by 100% from 2020 to 2021, HSBCs changed by a factor of 5 from 2019 to 2021. It is a highly volatile series and is no use for portfolio construction and agencies do not request or publish them.

So to be clear in a discussion where it has already been agreed you wouldn't use operating cashflows for a financial you use an example of a financial to discredit the existence of cashflow forecasts?

To recap. You state dividends are the means a market values the prices of shares despite the volatility of share prices being greater than that of either dividends, or forecasts of dividends.

You dismiss earnings, or more specifically cashflows, as a better means of valuation, or indeed of forecasting likely dividends.

You claim forecasts of cashflows don't exist, but then have to amend your claim to one where 3rd party agencies don't publish such forecasts, and then state they are of no use for portfolio construction when some successfully use them for that exact purpose.

[OhNoNotimAgain]

So you have changed from


to

News agencies don't provide those forecasts of operating cash flow to news agency subscribers...

You miss the point, analysts didn't generate them because they were so subjective and irrelevant.

No you miss the point!

They do generate them and aren't irrelevant. Cashflows and earnings generate the ability to pay those dividends. Can you stop digging your hole of denial and accept they are generated. they do exist, and some find them useful. I have no issue with you choosing your own investment path and strategy but why are you so keen to deny others their alternative routes?

Falsehoods are there to be called out.

BP's operating cash flow changed by 100% from 2020 to 2021, HSBCs changed by a factor of 5 from 2019 to 2021. It is a highly volatile series and is no use for portfolio construction and agencies do not request or publish them.

So to be clear in a discussion where it has already been agreed you wouldn't use operating cashflows for a financial you use an example of a financial to discredit the existence of cashflow forecasts?

To recap. You state dividends are the means a market values the prices of shares despite the volatility of share prices being greater than that of either dividends, or forecasts of dividends.

You dismiss earnings, or more specifically cashflows, as a better means of valuation, or indeed of forecasting likely dividends.

You claim forecasts of cashflows don't exist, but then have to amend your claim to one where 3rd party agencies don't publish such forecasts, and then state they are of no use for portfolio construction when some successfully use them for that exact purpose.

Those figures were historic not forecast.
God, every time I return to these boards thinking that the change in economic environment might trigger some intelligent debate using hard data I discover that the mind sets are so entrenched that it is impossible.
The hard data is there. You can read it.

Goodbye, again.

[dealtn]

Those figures were historic not forecast.
God, every time I return to these boards thinking that the change in economic environment might trigger some intelligent debate using hard data I discover that the mind sets are so entrenched that it is impossible.
The hard data is there. You can read it.

Goodbye, again.

Yes I can read it. But the majority of your interventions here have concerned analaysts and their forecasts of cashflows, denying they existed. They do.

Now turning to actual outcomes you provide BP as an example. Back in 2020 nobody, including you or I, or any financial analyst, could have forecasted with any confidence a Russian invasion of Ukraine, and a resulting significant increase in commodity prices - and resulting margin expansion for primary producers.

So lets look at what has happened to each of cashflows, dividends, and share prices since 2020 - we might refer to them as

The hard data is there. You can read it.

Cashflows, you explain have "changed by 100%".

Dividends the facts show were 5.25c quarterly, and have recently increased to 5.46c and are now 6.06c quarterly

Share price is up 90% over the last 2 years.

So yes, lets "trigger some intelligent debate" and consider which of the alternatives of cashflows in or dividends out were the liklier cause of the near doubling in the share price of your chosen example of BP.

[88V8]

So yes, lets "trigger some intelligent debate" and consider which of the alternatives of cashflows in or dividends out were the likelier cause of the near doubling in the share price of your chosen example of BP.

Not being funny, and you may have posted somewhere, but just wondering what's in your own portfolio, how you chose it, and what your investment aims are?

V8

[vand]

Haven't read the whole thread and don't know if it has been discussed, but a more full analysis looks at "shareholder yield" which is

dividends + buybacks + debt repayment

All these are ways of returning capital to the equity holder from the business

There has been plenty written about this being a better way of measuring returned cash and correlation to long term total return than just looking at dividends

https://mebfaber.com/2016/08/10/9774/

[dealtn]

So yes, lets "trigger some intelligent debate" and consider which of the alternatives of cashflows in or dividends out were the likelier cause of the near doubling in the share price of your chosen example of BP.

Not being funny, and you may have posted somewhere, but just wondering what's in your own portfolio, how you chose it, and what your investment aims are?

V8

My largest investment is in a Football League Club of which I am a Director.

I also run 4 equity portfolios. One in my name, one my wife, and two for my children as pensions.

Broadly that's 28 individual shares with a split between "value" and "growth". I genuinely haven't looked at the portfolio(s), or individual valuations at any point this tax year. Despite retiring once I am now so busy working again I don't have the time. I used to monitor the markets for at least 2 hours each day, now I am spending that time on average each month. At some undetermined point in the future I will see if any of that value has been "outed" or any "growth" occurred (and whether either has translated into share, or portfolio, growth).

I also hold a VCT portfolio which has been "buy and forget" in the main.

I also own property.

My interaction with this site, and the Boards such as Stocks and Share Discussions, and Company News, has fallen considerably concurrent with my lack of available time, but also the lower number of discussions. conversations, interactions and people on such Boards. I often say, or it can be worked out, if the shares being discussed are ones I own (and perhaps why).

[Charlottesquare]

With that said, I also think though, that we should again highlight what you've already said regarding the bath analogy, which is that it's only trying to show the frictional-cost nature of companies paying out dividends and any subsequent re-investment of them, and I think you've now been happy to make clear that it was never intended to cover any 'valuation difference' between any two given baths, where completely different market valuations might be placed on each of them, and which may (as shown in the Credit Suisse report) subsequently go on to play a large role in long-term total returns from investments in each of them.

Yes but what is important is that those valuation differences change over time. You need to be buying something cheap to its relative valuation, and selling when that cheapness disappears, preferably when it has become expensive, and repeating. These changes are small, take a long time to "out", but compound. Buy and Hold, in itself, even if you identify the "cheap" at inception, isn't enough.

So strategies that identify cheapness, and rebalance as that cheapness changes have chances of success. But as has been pointed out cheapness isn't best sought through filtering by dividend yields. There are better alternative filters. But there will be overlap and positive correlation with High Dividend Yields for sure. Correlation isn't causation though.

I'm late to the thread and have to be honest that currently my brain isn't in the right place to take all of this in. Sorry, as I'd like to.

When I buy a share I make sure I have a reason for the purchase and an exit strategy. For me that's quite a difficult task and I genuinely find I struggle to buy. Which leaves me defaulting to funds. I have an issue with that as I can't really value the fund and looking at past performance isn't good enough for me.

Recently I purchased a small number of shares in Bellway and Gleeson. Both house builders. The Bellway purchase was based on the book value of the company which was about 0.75 and Bellway's plans for growth. Currently the forward dividend projection of the purchase is around 8% with 3x cover. There are two issue with the fundamentals which I'm monitoring before I top up or simply hold what I've got. Bellway have a legacy issue with cladding (Grenfell Tower). This is impacting on the share price and the margins. However, Bellway have grown their sales by just over 10% this year. In addition their debt has risen by £80m in a year and that makes me feel uneasy. I need to review why the debt has grown. Is it to cover for additional work in progress connected with growth or is it essentially to top up the dividend payment. Forward sales are very robust, over 7,500 at year end and they have a good land bank.

So Bellway was a book value purchase - I didn't allow the dividend to enter my decision to buy as I prefer to look at forward EPS and the companies ability to deliver on that number.

Gleeson's stock price has fallen 20% since my purchase. Two words define that fall - Liz Truss. I never saw that one coming. I'm in a position to double down on my holdings in Gleeson, which are very small, subject to the six monthly news flow. Gleeson's was growth purchase. I believe they are well positioned to grow their volume rapidly. They have no debt and reasonable cash levels. I suspect the market is punishing the share price as 75% of Gleeson's purchasers are first time buyers. Government have withdrawn support for first time buyers of new homes in October and Liz Truss managed to send the mortgage market for first time buyers into turmoil at about the same time. The fundamentals of the business remain intact and I've carried out an acid test on affordability for the Gleeson's product. And at mortgage levels of 6% their business model remains viable and first time buyers will be able to afford their product. Noting the current dividend yield is 4.5% with 5x cover (very approximate - DYOR)

I would begin reviewing the sale of the Bellway stock

1. As the book values rises above 1, subject to momentum
2. If their volume begins to exceed 16-17,000
3. The fundamentals change dramatically and the investment would be better suited elsewhere

I would begin reviewing the sale of the Gleeson stock

1. If their volume reaches 4,000 and appears to have no momentum for further growth
2. The fundamentals change

AiY(D)

On the housebuilders I have talked to two different smaller ones in the last three weeks who have both given up trying to sell into the first time buyer market and are instead refinancing built not sold flats into let positions, this has tricky bits to deal with (vat being an issue) but apparently buyers with little equity can no longer meet the bank affordability tests.

[AsleepInYorkshire]

With that said, I also think though, that we should again highlight what you've already said regarding the bath analogy, which is that it's only trying to show the frictional-cost nature of companies paying out dividends and any subsequent re-investment of them, and I think you've now been happy to make clear that it was never intended to cover any 'valuation difference' between any two given baths, where completely different market valuations might be placed on each of them, and which may (as shown in the Credit Suisse report) subsequently go on to play a large role in long-term total returns from investments in each of them.

Yes but what is important is that those valuation differences change over time. You need to be buying something cheap to its relative valuation, and selling when that cheapness disappears, preferably when it has become expensive, and repeating. These changes are small, take a long time to "out", but compound. Buy and Hold, in itself, even if you identify the "cheap" at inception, isn't enough.

So strategies that identify cheapness, and rebalance as that cheapness changes have chances of success. But as has been pointed out cheapness isn't best sought through filtering by dividend yields. There are better alternative filters. But there will be overlap and positive correlation with High Dividend Yields for sure. Correlation isn't causation though.

I'm late to the thread and have to be honest that currently my brain isn't in the right place to take all of this in. Sorry, as I'd like to.

When I buy a share I make sure I have a reason for the purchase and an exit strategy. For me that's quite a difficult task and I genuinely find I struggle to buy. Which leaves me defaulting to funds. I have an issue with that as I can't really value the fund and looking at past performance isn't good enough for me.

Recently I purchased a small number of shares in Bellway and Gleeson. Both house builders. The Bellway purchase was based on the book value of the company which was about 0.75 and Bellway's plans for growth. Currently the forward dividend projection of the purchase is around 8% with 3x cover. There are two issue with the fundamentals which I'm monitoring before I top up or simply hold what I've got. Bellway have a legacy issue with cladding (Grenfell Tower). This is impacting on the share price and the margins. However, Bellway have grown their sales by just over 10% this year. In addition their debt has risen by £80m in a year and that makes me feel uneasy. I need to review why the debt has grown. Is it to cover for additional work in progress connected with growth or is it essentially to top up the dividend payment. Forward sales are very robust, over 7,500 at year end and they have a good land bank.

So Bellway was a book value purchase - I didn't allow the dividend to enter my decision to buy as I prefer to look at forward EPS and the companies ability to deliver on that number.

Gleeson's stock price has fallen 20% since my purchase. Two words define that fall - Liz Truss. I never saw that one coming. I'm in a position to double down on my holdings in Gleeson, which are very small, subject to the six monthly news flow. Gleeson's was growth purchase. I believe they are well positioned to grow their volume rapidly. They have no debt and reasonable cash levels. I suspect the market is punishing the share price as 75% of Gleeson's purchasers are first time buyers. Government have withdrawn support for first time buyers of new homes in October and Liz Truss managed to send the mortgage market for first time buyers into turmoil at about the same time. The fundamentals of the business remain intact and I've carried out an acid test on affordability for the Gleeson's product. And at mortgage levels of 6% their business model remains viable and first time buyers will be able to afford their product. Noting the current dividend yield is 4.5% with 5x cover (very approximate - DYOR)

I would begin reviewing the sale of the Bellway stock

1. As the book values rises above 1, subject to momentum
2. If their volume begins to exceed 16-17,000
3. The fundamentals change dramatically and the investment would be better suited elsewhere

I would begin reviewing the sale of the Gleeson stock

1. If their volume reaches 4,000 and appears to have no momentum for further growth
2. The fundamentals change

AiY(D)

On the housebuilders I have talked to two different smaller ones in the last three weeks who have both given up trying to sell into the first time buyer market and are instead refinancing built not sold flats into let positions, this has tricky bits to deal with (vat being an issue) but apparently buyers with little equity can no longer meet the bank affordability tests.

Hi,

I've not looked closely at this subject (it being on my "todo" list). I'd be surprised if Gleeson's new homes were considered unaffordable, but agree there's been a "shock" to the mortgage market. I don't know if this would interest you and I beg tolerance and forgiveness for straying slightly off-topic ... Gleeson Group

AiY(D)

[Charlottesquare]

I've not looked closely at this subject (it being on my "todo" list). I'd be surprised if Gleeson's new homes were considered unaffordable, but agree there's been a "shock" to the mortgage market. I don't know if this would interest you and I beg tolerance and forgiveness for straying slightly off-topic ... Gleeson Group

AiY(D)

They look interesting, I will take a look, they cannot be any worse than my Bellway shares.

[spasmodicus]

So yes, lets "trigger some intelligent debate" and consider which of the alternatives of cashflows in or dividends out were the liklier cause of the near doubling in the share price of your chosen example of BP.

or neither of the above. BP's share price is only just about back up to where it was 3 years ago, at which point it was already becoming afflicted by a deep media inspired hatred of anything to do with oil and gas. It was then hit by pestilence (COVID) at which point the SP halved and then more recently by war (writing off Rosneft), despite which it carried on climbing. Their accountants have probably been trying to think of ways of hiding the enormous cash flows from high oil asnd gas prices from the recent series of chancellors, so the their published figures are probably phoney.

In any case, this thread originally looked at the idea that, on average over a large collection of companies, over a long period, the high dividend subset might outperform the low/no dividend "growth" subset. Individual cases don't throw much light on that question.

S
(who bought oilies in the dip, including BP and such niceties as dividends and cash flows never crossed his mind)