>Inspired by discussion on these lists and by a talk Dean Baker gave here
>on the stock market the other day, I decided to take a look at total
>payouts to shareholders, defined as dividends minus net new equity
>issues. (The latter being negative in recent years.) The price-payout
>ratio, then, is the market value of equity divided by the total payout.
>This is for nonfinancial, nonfarm corporate businesses, from the Flow of
>Funds.
>
>The results were interesting.
>
>1999's price-payout ratio, 36.8, was almost exactly equal to the postwar
>average of 35.3. Even though the price earnings ratio is over twice its
>historic average, the proportion of profits being paid out to
>shareholders, 74.4%, is also over twice its historic average of 35.1%.
Why use market cap here? Why not profits or cash flow, which is a better measure of the sustainability of the high-payout strategy?
From 1952-81, corps paid out 21% of cash flow in the form of dividends less new equity issues; from 1982-99, that average was 38%; since 1995, it's been 48%. Investors may be valuing their payouts in line with previous averages, but are they being rationally exuberant to regard these payouts as sustainable?
Doug