Amundi first global investment manager to propose dividends suspension.
Analysts predict further pared-back payments as long-term effects of coronavirus pandemic bed in.
Original article by Owen Walker, Financial Times 4 April, 2020.
Martin Harrison comments:
A broadening consensus in favour of a dividend and buyback moratorium has a lot in common with the pandemic urge for toilet-paper hoarding, and makes as much sense as lending that official sanction.
This conveys a widespread misconception about how companies are meant to function and what the role of dividend policy ought to be within them.
Companies aren’t like you and me: they’re not supposed to be about squirrelling away abundant capital for support in old age and adversity; far from it.
Companies exist only to harvest shareholder returns from projects affording net profits in excess of their cost of capital. Otherwise they’re dead on their feet.
If they have more capital than viable projects then they should set about returning some to shareholders for efficient redistribution to alternative uses.
Buybacks are a more tax-efficient way of doing this when profits temporarily spike or project pay-offs in excess of required return are unusually hard to come by.
Because at near zero interest rates no one in their right mind invests in any company, even an asset manager, for its corporate cash-management prowess.
And companies with access to attractive projects are able to raise more capital to exploit them. They should not be encouraged to dilute returns by hoarding it beyond foreseeable contingencies.
In which context, dividend policy has vital signalling functions: to demonstrate corporate return prowess, shape expectations and smooth distributions from lumpy profits.
Because, for all our focus on share prices, shareholder returns over the long-term derive almost exclusively from dividend growth (See, e.g.: Triumph of the Optimists).
And for there to be any corporate ‘long-term’, the prerequisite is that companies strive to achieve an optimum balance of equity and debt capital.
In this respect the present circumstances are, no doubt, exceptionally challenging.
So, if companies have been flying too close to the wind and must pay down debt or stash equity capital at the expense of dividends, shareholders are entitled to draw their own conclusions.
Especially, if the companies are asset managers!
But, in our haste to save jobs and pre-empt bailouts or emergency rights issues let’s not yield carte-blanche to cash-hoarding.
Injunctions for capital conservation are surely already redundant if they are warranted.
While over-zealous suspension of corporate distributions in general risks setting a precedent almost as distressing as making toilet tissue of share certificates.
Martin S. Harrison CEO of SUMMA Limited, 4 April, 2020.