In the context of the eurozone equity market, total return is defined as the sum of contributions to earnings per share growth, plus changes in share price compared to earnings (P/E) and dividend growth. Average annual dividend yield is observably higher than share price yield over the past 20 years, while recording lower volatility than earnings per share. During years when the economic climate is undynamic, expanding financial multiples are the main contributor towards capital gains.
Conversely, in a situation of broadly distributed growth, EPS growth becomes the leading contributing factor to capital gains. The performance gap between the eurozone and the US is chiefly attributable to share buyback programmes. Share buybacks are prioritised over dividend payments as shareholder pay-out in the US, due to their more advantageous tax treatment.
Dynamic allocation to a variety of performance factors provides better control over total return dispersion in the context of active investment management in the equity market.
