Are Corporate Payouts Abnormally High in the 2000s?

At the turn of the century, financial economists worried about “disappearing dividends” (Fama and French, 2001). Times have changed. In recent years, the media and politicians have been increasingly concerned about the magnitude of corporate payouts. These concerns are primarily focused on the size of stock buybacks rather than dividend payments. For example, Senator Marco Rubio complains that “At present, Wall Street rewards companies for engaging in stock buybacks, temporarily increasing their stock prices at the expense of productive investment” and suggests taxing repurchases. Senators Chuck Schumer and Bernie Sanders want to restrict repurchases because they are a form “corporate self-indulgence.”

In our paper titled Are corporate payouts abnormally high in the 2000s?, we investigate whether payouts are abnormally high in the 2000s. By abnormally high, we mean payouts that are higher than expected given the payout policies of firms before 2000. In other words, if a firm in the 2000s makes the same payouts as an identical firm in the same situation before the 2000s, its payouts in the 2000s are not abnormally high. Abnormally high payouts can be a good development if funds retained within the firm would otherwise have been wasted, or a bad development if the funds would have been better employed within the firm.  However, if payouts in the 2000s are consistent with how firms paid out in earlier years, then payout policies have not changed. In that case, the explanation for the high payouts in the 2000s is simply that firm characteristics in the 2000s are different from firm characteristics in earlier years.

We gather data on payouts and firm characteristics from 1971 to 2018 for non-financial firms listed on U.S. exchanges. To adjust for inflation, we examine real dollar amounts using the price level in 2017. Not surprisingly, we find that payouts from 2000 to 2017 are large. The companies in our sample pay out almost $10 trillion from 2000 to 2017—gross payouts are $10,823 billion and net payouts, which net out equity issues by repurchasing firms, are $9,862 billion. In the 2000s, annual aggregate real payouts average roughly three times their pre-2000 level. The average ratio of aggregate net payouts to aggregate operating income increases from 18.9% to 32.4%. The year 2018 stands out, as aggregate payouts as a percentage of operating income are 48.4%. We show that payouts increase both because firms’ capacity to pay increases and because their willingness to pay increases. Specifically, in the aggregate, 38% of the increase in payouts is due to the fact that firms earn more and 62% is explained by the fact that firms have a higher payout rate.

We conduct our analysis at both the aggregate level and at the firm level. Using a time-series model of aggregate payouts first estimated in the early 2000s by Dittmar and Dittmar, we find that estimating the model from 1971-1999 and using actual values of the explanatory variables in the 2000s to predict payouts conditional on realizations of explanatory variables results in fairly accurate predictions.  For example, the model predicts that real aggregate payouts in 2017 should be $784 billion; actual payouts are $734 billion. Such a result suggests that a large part of the aggregate increase in payouts can be understood using a model developed before that increase takes place. When examining firm-level payout rates, a model estimated from 1971 to 1999 also predicts an increase in the average net payout rate. For the sample of firms for which our regression model data is available, the average payout rate of the whole sample is 7.3 percentage points higher in the 2000s relative to 1971-1999. When we restrict this sample to firms that have payouts, the payout rate increases by 10.8 percentage points. When we estimate a model over 1971-1999, this model predicts an increase of 5.2 percentage points in the average payout rate of all firms and an increase of 5.3 percentage points in the average payout rate of the firms with payouts. However, this model does not perform well in the years when the average net payout rate is extremely high.

We also investigate whether payout rates are higher in the 2000s by estimating our models over the whole sample period but allowing for an increase in the payout rate in the 2000s regardless of firm characteristics.  We find no evidence that a firm pays out more in the 2000s than it did before, given its characteristics. In other words, existing firms do not suddenly pay out more. However, among firms that have payouts, there are more firms that have higher payouts given their characteristics in the 2000s than there were before. Another way to put this is that the higher payout rates seem to be due to a change in the composition of the sample of firms, so that the sample includes more firms with high payouts given their characteristics. Further, we find that the firms with higher payouts are firms that initiated payouts with repurchases. We also test whether payout rates in the 2000s are more strongly related to the firm characteristics that are positively correlated with payout rates in 1971-1999, as would be expected if managers’ incentives for payouts are higher in the 2000s. We find that this is the case.

Since models estimated from 1971 to 1999 explain a sizeable fraction of the increase in payout rates during the 2000s, changes in firm characteristics must be of first-order importance to understand why payout rates increase. We show that four characteristics are most important in explaining the increase in payout rates across firms: increases in firm age, size, and cash holdings, and decreases in leverage. Though investment decreases in the 2000s and is negatively related to payouts, the decrease in investment is less important in explaining the increase in payouts than any of these four characteristics.

The question this paper tries to answer is whether payouts in the 2000s are abnormal. The answer is that much of the increase in payouts can be explained by known determinants of payouts. Our study also shows that even if corporations decreased investment to increase payouts, which we do not view as plausible, the decrease in investment would account for only a small increase in payouts.

The complete paper is available for download here.