Monday, February 11, 2013

Dipolar dividend payout conundrum

Gerard Minack, the perma-bear from Morgan Stanley, raised concerns on Inside Business this week about the high dividend payout ratio (dividends paid as a proportion of profits) for Australian listed corporations:
GERARD MINACK: That in a way is the Aussie market. We're a high dividend paying market by global standards, we're a low earning market by global standards. How do you square the circle? We have a much higher payout ratio.

ALAN KOHLER: Well 80 per cent on average, isn't it?

GERARD MINACK: That's right.


GERARD MINACK: In the US it's closer to 25 per cent and near all time lows. We're nosebleed territory in terms of payout ratio.
Minack's concern basically I think relates to business reinvestment of profits and consequent sustainability of dividends. Meanwhile in the USA a discussion has broken out among some high profile economists from a different perspective. Not only are US corporates not paying out dividends they are not reinvesting their profits either but rather hoarding cash.

Paul Krugman has a couple of posts on this: Corporate hoarding and the slow recovery; Still Say's Law after all these years. Tyler Cowen doesn't think it's a problem: Are corporate profits a sink hole for purchasing power? As usual there is an excellent summary from Noahpinion: The corporate cash puzzle.
If there is a Great Stagnation, and corporations see no attractive opportunities for growth, then shouldn't they just return their earnings to shareholders as dividends?
It is an interesting contrast with both high and low dividend payout ratios perceived as a potential problem. Business (re)investment, or its absence, is the concern which links the two. In not dissimilar economic circumstances to the USA a similar hoarding has been previously noted in Japan for some time.

The high Australian payout ratio is also likely influenced by factors such as the dividend tax imputation system, much beloved of retail investors and also attractive to super funds in the yield hungry Australian market.

Nicholas Gruen has suggested in the past that Australia should scrap dividend imputation in favour of a lower corporate tax rate: Another column on tax reform.

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