NEW YORK — After focusing on how companies employ their free cash flow throughout a four-decade career in investing, William W. Priest says for the first time in a long time market trends are putting the wind at his back.
In recent months, Epoch Investment Partners, the New York-based firm Mr. Priest launched with three colleagues in 2004, has seen that wind blowing institutional money their way — with $1 billion in new mandates since April 1 set to lift assets under management to $3.5 billion.
In an interview, Mr. Priest said the price-earnings expansion that drove the bulk of investment gains during the 1980s and 1990s, when interest rates were trending lower, is dead. The new king is "shareholder yield," broadly defined as dividend payouts, debt reduction and stock repurchase programs, he said.
Dividend payouts as a percentage of free cash flow are at a 30-year low, and firms that allow cash to languish on their balance sheets will increasingly become the targets of private equity firms, eager to deploy their multibillion-dollar buyout funds. In that environment, listed companies will face growing pressure to put their cash to shareholder-friendly use, Mr. Priest predicts.
Focusing stock selection on companies that will return cash to shareholders if they can't find profitable ways to use it results in portfolios that can make money for investors no matter what's happening to price-earnings ratios — an absolute-return orientation in tune with current market trends, Mr. Priest said.