23rd July 2012
"Second quarter dividend payouts to shareholders surged by 18 per cent to £22.6 billion, the highest for the period on record, according to Capita Registrars. That took the sum for the first half of the year to £41.4 billion, up 21 per cent from a year earlier." The record payouts were driven by large one-off special dividends from Old Mutual and GlaxoSmithKline.
The report appears under the headline: "The City's Great Giveaway". Higher dividends are to be welcomed for investors, who have had precious few other sources of yield since the Bank of England slashed interest rates, but they are less welcome for the economy.
Dividends: Good for investors, bad for the economy?
Business investment remains a key stumbling block for economic recovery in the UK. This report from the European Commission suggests business investment has dropped as anxious firms have been reluctant to invest: " Business investment has fallen very sharply, as, the commission added, saying, "an unprecedented drop in business investment after 2007 saw the UK level of gross fixed capital formation as a share of GDP fall to 14.3 % in 2011, the third lowest level in the EU-27".
That said, paying dividends is better than the alternative. At least, via dividends, the money is circulated back into the economy. This Reuters piece from David Cay Johnston suggests that there are plenty of companies that are simply sitting on their cash, neither returning it to shareholders nor investing: "IRS data suggests that, globally, U.S. nonfinancial companies hold at least three times more cash and other liquid assets than the Federal Reserve reports, idle money that could be creating jobs, funding dividends or even paying a stiff federal penalty tax for hoarding corporate cash."
How to get from: 'stashing the cash' to…
This is a problem for the economy and for investors. "These companies had 11.3 percent of their assets in cash, or enough to pay their 2009 corporate income tax bills, which amounted to $148 billion, more than 34 times over. In short, U.S. companies hold vastly more cash than is needed to finance their operations.
"For investors, companies holding 11.3 percent of their assets in cash lowers returns. Did you buy shares of American Widget so executives could park profits in savings accounts? For workers, idle cash means idle hands and minds. With one in five Americans unemployed or underemployed, and real median wages in 2010 back down to the level of 1999, this is no time for capital to go on an extended holiday."
Sharing the wealth
The solution to unlocking these corporate cash piles has been much debated, but seems ultimately to come down to confidence. This is highlighted by a report by left-leaning think tank the IPPR: "The report says reluctance on the part of companies in the UK to spend money on increasing their productive capacity is understandable, given the uncertain economic outlook, and that policy needs to be oriented towards reducing uncertainty."
It is debatable that governments have the power to do this single-handedly. The Eurozone crisis is likely to trump the best efforts of UK policymakers to push companies to invest. However, some pick-up in economic activity might do the trick. Simon Ward, chief economist at Henderson, believes that there are reasons economic growth may start to improve towards the end of the year. In particular, the increase in real money expansion should create economic momentum:
"Six-month real money expansion in the G7 plus emerging E7 economies, however, stabilised in April / May and appears to have recovered modestly in June, based on early data. If confirmed, this recovery holds out hope of a revival in economic momentum in late 2012, allowing for the typical six-month lead.