Why we look beyond dividends in our value approach

The primary focus for financial advisors, wealth managers, and portfolio managers when evaluating businesses for investment is determining a company's value to its shareholders. This is often assessed through the distribution of excess profits via dividends, which provide a dependable income stream and are perceived as more reliable than stock price gains. However, companies that aim for the highest dividends are often more susceptible to disappointments, as they might cut or suspend dividends unexpectedly. Therefore, it is prudent to focus on companies with the potential to grow their dividends, as these businesses are likely managing their resources for future growth and shareholder value enhancement.

The strategy of focusing on income growers rather than merely seeking the highest dividend yields is emphasized. Companies that can consistently grow their income often demonstrate robust growth in earnings and revenue, which can make them more resilient in fluctuating market conditions. This approach aligns with the objective of identifying businesses with strong growth profiles that can withstand shifts in market preferences.

Share buybacks are highlighted as another method through which companies can reward shareholders, effectively increasing income per share. This practice has become more prevalent since the 1990s, with many companies opting to repurchase shares rather than increase dividend payouts, thereby enhancing total shareholder returns.

As value investors, the strategy involves looking beyond traditional valuation metrics to identify companies undergoing significant positive changes, whether internal or external. This involves employing sector-specific and company-specific valuation methodologies to uncover opportunities across the value spectrum. Such a nuanced approach allows for the identification of undervalued companies poised for growth, thus offering potential investment opportunities that align with both income growth and value investing principles.