Assets and Their Defense

Think that big acquisition and borrowing a bunch of dough was a good idea? Sometimes your good intentions can work against you...Here is a link to a great new paper scheduled for publication later in the year by The Journal of Finance - "Asset Growth and the Cross-Section of Stock Returns" by Schill, Gulen, and Cooper (nod to SmartMoney article by Hough that brought it to my attention. He mentions NASDAQ Stock Market (NDAQ) and Best Buy (BBY) as a couple of stocks that pass the screen).

Long time readers know that I am a fan of using payout yield over dividend yield, and this paper is even more encompassing. It basically says a decrease in total assets is good - things like dividends, buybacks, spinoffs, and paying down debt. Ominous signs for future stock performance - acquisitions, share issuances, borrowing, and sitting on lots of cash.

Abstract:

We test for firm-level asset investment effects in returns by examining the cross-sectional relation between firm asset growth and subsequent stock returns. As a test variable, we use the year-on-year percentage change in total assets. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks, a subgroup of firms for which other documented predictors of the cross-section lose much of their predictive ability. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns.