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Back to the Future: Investors Refocus on Yield

The BCG 2012 Investor Survey
April 24, 2012 by Jeffrey Kotzen, Tim Nolan, and Frank Plaschke
In This Article
  • In the first quarter of 2012, BCG surveyed 165 portfolio managers and buy-side and sell-side analysts.

  • The key finding: respondents are becoming more pessimistic about the prospects of the global economy and global equity markets.

  • As a result, they are making the health of a company’s free-cash-flow yield their top investment criterion and want to see more of that yield in higher dividend payouts.


This is the second in a series of online articles published in advance of The Boston Consulting Group’s 2012 Value Creators Report. In February 2012, we identified the key value-creation trends in 2011. In the fall of 2012, we will publish the full report, including detailed rankings of the top performers worldwide and in 20 industries for the five-year period from 2007 through 2011.

2012 Value Creators

As global economic recovery has been buffeted by events ranging from the Japanese earthquake and tsunami to the ongoing fiscal crisis in the euro zone, investors have become more pessimistic about the level of total shareholder returns (TSR) that companies will deliver. In response, investors have significantly shifted their focus to the strength of a company’s free-cash-flow yield as a primary indicator of its current health and value-creation potential, as well as on direct distributions of cash in the form of dividends as an increasingly important component of TSR.

This is the picture that emerges from a recent survey conducted by The Boston Consulting Group. During the first quarter of 2012, BCG invited approximately 650 portfolio managers and buy-side and sell-side analysts to participate in an online survey. The survey is the fourth in a series that BCG has conducted since 2009, probing investors’ views on the global economic environment and priorities for business value creation.

We received 165 responses to our 2012 survey (a response rate of about 25 percent) from individuals at firms that, collectively, are responsible for approximately $1.2 trillion in assets under management and cover a wide range of industries and locations. Four key findings stand out:

  • Renewed Pessimism. Respondents have shifted from the “cautious bullishness” we identified last year to a more pessimistic take on the global economy. They believe the recovery is happening more slowly than they thought it would last year and expect less economic growth, less earnings growth, and lower TSR in 2012 and subsequent years as a result.

  • The Primacy of Free-Cash-Flow Yield. In an environment in which investors have scaled back their expectations for growth, respondents have made a company’s free-cash-flow yield their top investment criterion. And they increasingly want to see more of that yield in the form of higher dividend-payout ratios, a value creation strategy that, earlier this year, we dubbed “the rise of the cash machine.”

  • Diverging Views of the U.S. and Europe. Investors are also differentiating more carefully between regions such as Europe, with relatively poor prospects for future growth, and those such as the U.S., where prospects are more promising. Investors who focus on European equities are significantly more pessimistic than those who focus on U.S. equities.

  • The Imperative of Alignment. Given the impact of the ongoing volatility in equity markets on investor expectations, it is critical for senior executives to develop and communicate a clear and compelling investment thesis, in which an organization’s business, financial, and investor strategies are carefully aligned and mutually reinforcing. Although our survey suggests that companies are getting better at such alignment, nearly two-thirds of investors continue to believe that the companies they follow are not well aligned across these three dimensions.