Is there a strong correlation between high economic growth and strong investment returns? A recent study of economic growth in 14 industrialized countries by Orbis, the global asset management partner of investment management firm Allan Gray of South Africa, proves that there is very little correlation between growth in real dividends per share over the 20th century and economic growth.
Chart - Real Dividend Growth Per Share and Economic Growth
Many investors mistakenly believe that high-growth countries will deliver high investment returns. The study used real dividend growth per share instead of earnings since earnings are impacted by accounting changes over the years. Dividend growth is a good indicator of returns delivered to shareholders.
From the chart above, we can infer that Japan had an annual real GDP growth of 4.2% in the 20th century. But it had a negative dividend growth rate of 3.3% per year during the period. Italy, Belgium, France, Germany, Spain, the Netherlands, Switzerland and Ireland also had positive GDP growth but negative real dividend growth.
Even when the real GDP and dividend growth rates were going in the same direction, the differences between the two rates were too high. Canada, USA, the UK and Australia had this scenario.
Overall it is not the high level economic or industry conditions that affect a company’s performance. Rather it is the competition and individual performance that determines a company’s financial success.
The above theory holds true when we look at the high growth economies of India, Brazil and China. Very few people invest in the companies domiciled in these countries for their dividend growth. Similarly in the US, during the dot com era people invested for the overall GDP growth and a company’s earnings growth rather the real dividend growth.