A boat passes near London's financial district at Canary Wharf in London. Corporate Britain is dying but not a natural death. Photograph: Shutterstock
The ratio of price to earnings of the FTSE 100 has collapsed, from roughly 17 times in 2006 to 11 times today. Investors’ valuations should reflect the present value of expected cash flows. Cash flows can be divided, on a rolling basis, into the actual dividends and buy-backs made, or expected over the subsequent 10-year period and the cash flows thereafter – or the “terminal value”.
All this has reduced corporates’ ability to invest and so grow. The resulting decline in the prospects for growth in earnings and so capital gains has then forced higher payouts, which have further reduced cash for investment. The shrinkage of the UK investor base has also increased the claims of non-UK investors. In 2004, 65 per cent of distributions stayed in the UK. By 2022, this was roughly 25 per cent. This, then, is a self-reinforcing vicious cycle of corporate self-liquidation.
Source: News Formal (newsformal.com)