The Financial Times has run a piece concerning the dividend payouts of companies against their pension deficit. The line runs as follows: UK blue chips could cover pension deficit with one years’ dividend payouts.
Yes, they probably could. The government could also get the NHS back on its feet by withholding foreign aid , or welfare handouts, or defence (actually, I’m not sure there would be enough money in defence to cover a Cornetto). The fact is, as much as we can look at a pool of money, and redistribute it to suit our fancy, there will always be another stakeholder out there cursing the decision.
Some may argue that this is just a simple case of corporate responsibility vs corporate greed. I beg to differ. A company survives and thrives through investment. If you want grants and handouts, start a charity. In order to have a good corporate social responsibility, it first needs to have the funds to do so. As stated, these funds come largely from three main sources: profit, debt, investment. Profit in the vast majority of cases would not grow and expand a company at a desirable rate. So let’s turn to debt. Debt is great for a business, the interest is tax deductible, debt is quick to raise through a bond issue or bank loan, and the size of the cash injection can be put to immediate great use. The problem is, it has to be paid back.
Investments- stock. That’s where the dividends go. That’s where the good, long term capital is raised. The key stakeholders; you need them. But if you aren’t paying dividends, they will look elsewhere. Yes, they are hoping the share value increases, but dividends are the bread and butter. If you stop paying dividends, investors won’t invest, shares will be sold off in favour of others who do pay dividends, and share price will fall.
This issue is about long term profitability and potential for reinvestment. Let’s not enter the world of fantasy Utopia; dividends are here to stay. Let’s not vilify the private sector- it props up our entire economy.