Speaking in Sydney yesterday, Perennial Value senior portfolio manager Andrew Smith said Australian small cap companies should be looking to reinvest their earnings rather than pay out high dividends.
“We encourage companies, if they’ve got investments out there which are going to return 15 per cent plus or more returns, to go out and do the due diligence and spend the money wisely and get better returns for investors,” Mr Smith said.
“What we’re looking for in small caps is companies that are ultimately going to keep growing and keep going up the market cap scale … you don’t shrink to greatness.”
Mr Smith said there were “lots of great little companies” that were reinvesting into research and development.
“When we sit down with a company, we’re very pragmatic; we’ll assess what’s ahead of them,” he said.
“But often if we think a company’s got great growth potential ahead of them, we’ll say, ‘look: keep the payout ratio low … don’t pay out any dividends, just keep ploughing it back in the business’.
“And once they’ve established that market leadership and [are] getting the sales and the cash is coming out, that’s the appropriate time to pay it back.”
Mr Smith also indicated this was an emerging trend among small caps companies.
“I feel like the pendulum’s swinging a little bit back towards reinvestment, which is good for the economy; and if they make the right investment decision, then obviously good for earnings,” he said.
“I think it’s a pretty low-growth world out there. Cost of debt’s relatively low; boards are probably looking around going, ‘okay, we can start investing and getting decent returns for our shareholders’.”
Perennial Value senior portfolio manager Stephen Bruce said that while there were risks involved, small cap companies should look at long-term growth.
“There’s risk involved. You can burn your hands with the thing, but ultimately this market is about growth, is about investing for the future, and getting that balance right,” Mr Bruce said.
“So we’re always supportive of our companies who come to us and say, ‘this is what we’re spending our money on, this is what we’re doing’.”
