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Dividends are particularly
important to private shareholders, many of whom are retired and rely on
their dividend income. The maintenance of a healthy and growing dividend is
therefore important. Unfortunately, in recent years companies have tended to
reduce the level of dividends, either preferring to retain profits within
the company, issuing scrip dividends (ie. shares in lieu), or buying back
shares instead (see Share Buy Backs).
It has been argued that UK
companies historically paid out too much in dividends, leaving insufficient
to reinvest in the business, but there are several reasons why dividends are
important. These are:
1. The payment of a
cash dividend ultimately demonstrates that the company is generating real
cash profits. The lack of confidence in modern accounting is endemic, and
profits can apparently be displayed, when the company clearly is not
generating cash. If a company board has the confidence to pay a good, rising
dividend, then it is a stronger indication of the real health of the
business than any accounting profits.
2. Historically a large
proportion of the returns from equity investment have come from dividends.
In real terms, the FTSE indices (which ignores the failed companies anyway),
shows little growth over long periods of time, if reinvested dividends are
ignored.
3. Retaining dividends
within the company is fine if the company can gain a better return on that
investment than the individual shareholder could. But the directors do not
know what return the shareholder can obtain, and the shareholder may prefer
to make his own decision on whether to reinvest in the company or not.
Often, retained profits are simply invested at a lower rate of return by
injudicious expansion of the business, or worse, on a major acquisition to
the aggrandisement of the directors but negative return to shareholders. An
even worse situation is where a company retains cash but simply puts it on
deposit when it has no foreseeable use for it, instead of returning it to
shareholders - not an uncommon circumstance.
Dividend policy, or the
lack of it, is therefore a major concern to UKSA members. UKSA would like to
see more consistency and better guidelines on dividend policy for all
companies. |
