High dividends mean the business outlook is bad
If companies are so cash-rich why are they handing out dividends instead of spending or investing? But having pushed up the yield on shares with increased payments, why are share prices not higher?
Companies have got their balance sheets in order far quicker than governments or consumers.
That’s why they have no great wish to borrow. Businesses are throwing off money, but they are throwing it at their shareholders. They are not buying new equipment, not spending it on staff and not making takeovers.
Dividend payments rose by 19.4 per cent in 2011 according to Capita, one of the registrars making those payments.
Even stripping out a £2bn special dividend pledged by Vodafone and allowing for BP’s return to the lists after its oil spill, that’s an underlying rise of an inflation-busting 12.8 per cent and leaves the FTSE 100 yielding 3.5 per cent.
Normally if an investment is yielding so much more than money rates it is because investors doubt that payments will continue or doubt that they will rise with inflation. Yet Capital somehow forecasts that dividends will rise a further 11 per cent in 2012.
And those increased payments are still covered 2.77-times by earnings, which suggests that profits could take a big hit without shareholders having to feel the impact.
Total payments were £67.8bn in 2011 with special dividends accounting for only £2.9bn of that - and Vodafone accounting for all the increase in those one-off hand-outs. Much of that cash goes abroad but a sizable chunk goes into pension funds, making their finances more sound, which means that companies are less likely to need to top up black holes. That’s a double gain for corporates.
But the underlying worry is that if companies would rather give away their cash than spend it, they cannot be confident about future prospects. And if the investors receiving that money don’t think it worth pushing share prices higher, they too must be worried about the future.
