Companies aren't investing because they feel pressure to pay dividends instead.
The average wage in the UK has been stagnant. The government statistics show that in November 2019, the weekly real pay was £503 compared to £525 in February 2008.
The lack of spending power is squeezing household budgets, but the investor classes are celebrating the squeeze because it increases their returns.
In 2019, UK’s largest listed companies paid out a record dividend of £110.5bn to their shareholders. This compares to £99.8bn in 2018 and £95.1bn in 2017.
This does not include share buybacks, which further increase returns to shareholders. In any typical year over the period 2007 to 2017, aggregate share buybacks in the UK totalled between £15bn and £20bn.
Rising dividends are part of a shareholder-centric model of corporate governance where maintenance of the share price and returns to short-term shareholders takes priority over the long-term success of the company or the interests of other stakeholders.
The collapse of Carillion showed that some companies engage in dubious accounting practices to boost profits and borrow money to pay dividends.
With the exception of the recession period after the 2007-08 banking crash, major UK companies have paid dividends at a higher rate than their counterparts in other economies.
The Bank of England Chief Economist noted that in 1970 major companies typically paid £10 in dividends out of each £100 of profits, but by 2015 the amount rose to between £60 and £70, often accompanied by a squeeze on labour and investment.
A 2019 report noted that in the aftermath of the 2007-08 banking crash profits increased, but payments to shareholders – through dividends or share buybacks – increased even faster.
The concentration on returns to shareholders has not protected UK companies from foreign or hostile takeovers.
The concentration on share price movements has also exposed major companies to manipulation by speculators who are interested only in profits from share trading rather than the long-term success or survival of the companies.
Low investment in productive assets is one of the consequences of the cash drained by excessive dividends. The UK invests around 16.9% of its gross domestic product in long-term productive assets and languishes near the bottom of the EU member states’ investment table. Low wages and low investment inevitably lead to low productivity.
Companies increasingly borrow money to pay dividends. A Bank of England survey showed that only around 25 per cent of finance raised by companies is spent on investment, with the remainder split between purchasing financial assets, distributing to shareholders and keeping as cash.
The Bank of England noted that “80% of publicly listed businesses that underinvested answered yes when asked if financial market pressures for short-term returns were an obstacle to investment. 40% of privately owned businesses also answered yes.
While it may be surprising that private businesses, that do not have shareholders to pay out to, were also affected by this factor, our interpretation is that this reflects the broader macroeconomic environment of impatience that favours returns today over the equivalent value of returns tomorrow.”
The huge payment of dividends does not necessarily boost the UK economy. Around 54.9% of the value of the UK stock market is held by individuals and entities outside the UK. Pension funds and unit trusts hold about 2.4% and 9.6% respectively.
The payment of excessive dividends results in a huge export of capital. As income tax is not generally deducted at source, the foreign recipients of dividends do not pay any UK tax either.
It may be argued that the generous payment of dividends helps to attract capital to the UK, but that isn’t necessarily the case.
New share issues are relatively scarce. The Bank of England’s Chief Economist noted that among UK companies, share buybacks have consistently exceeded share issuance over the past decade, albeit to a lesser degree more recently.
In other words, over the past decade the equity market no longer appears to have been a source of net new financing to the UK corporate sector. Stock markets have become a cash extraction machine.
Employees have a vital interest in the long-term success of companies as their jobs and pensions depend on it, but they have no say in dividend or investment decisions.
At the end of 2019, UK’s 5,450 corporate defined benefit pension schemes had a deficit of around £190bn.
Directors are choosing to pay dividends rather than address pension scheme deficits, which can erode employee pension rights, especially if companies go bankrupt.
Unlike most major European countries, UK company law does not require employee-elected directors to sit on company boards. In this vacuum companies continue to prioritise shareholder interest over those of its employees.
Labour Party’s 2019 manifesto sought to check the short-term impulses of directors by promising to place worker directors on the boards of large companies and ensuing that companies enhance the welfare of all stakeholders.
The mainstream media rarely amplified this debate during the election. The Conservative government has offered no policies for addressing the consequences of cash extraction.
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