THERE is an interesting relation observed with regards to the payment of dividends and growth in profit. The May 31, 2011, issue of the Asian Wall Street Journal noted that when companies become stingy, profit growth is stunted.  With the recent development, there are fewer companies that pay out dividends in the form of cash. This could have an impact in the growth of business globally, including the Philippines.

During the period when companies had high ratio (between 1946 and 2001) of paying out dividends, earnings growth was higher over the next 10 years, beating the inflation rate by an average of 4.2-percentage points per annum.  This is through a study made eight years ago by the Financial Analysts Journal and quoted by this article.  The reverse is also true that when the pay-out ratio declined, earnings declined after inflation.

I can only say that if this is happening to foreign companies, this is not far-out to happen to our local companies.  The two main factors to explain this stinginess in paying out dividends are pride and pessimism.  Surely, for most of these companies it is not the lack of cash.  I understand that most of these firms in the Standard & Poor 500 companies are sitting on $1.02- trillion liquid assets.

Why then are these companies wary of paying cash dividends?  One reason given in the same article is that stockholders rely on stock dividends or share repurchases as a means to return cash to stockholders, thinking that this will be as equally attractive as cash dividends.  However, some believe that “share repurchases often destroy value instead of creating it” as the article tried to emphasize.  

In layman’s terms, I would like to explain this in as simple a way as I can.  When a stockholder is given cash, he can buy stocks according to what he thinks is the right time, which is more probably when stock prices are low and maybe a few shares on the high prices so he can have at least a low-average price.  Study shows otherwise. With the past decade showing that businesses were more adopting share repurchase when stock prices are especially high during the years 2006 and 2007, one would wonder if there were selfish motives because when prices were down in 2009 (when it was the best time to buy), stocks repurchase also declined.

At present, the stock market prices doubled since March 2009 (when market prices reach the lowest level) that repurchase had shown some benefits.

Companies may have good intentions and believe so much on their wisdom to choose the right stocks and prices compared to their investors that they prefer not to give cash dividends and instead spend the earnings supposedly appropriated for dividends to acquiring shares in the market.  But on hindsight we can see that many of these acquisitions resulted to losses. One example is Microsoft, who acquired Skype for something like $8.5 billion and  prior to that eBay paying $3.1 billion only to sell it at a loss later.

For Microsoft many thought that Skype was overpriced when Microsoft bought it but the company had no qualms—it must be so awash with idle cash that they didn’t care a bit buying such a company, which had been losing for the past years.

And the last probable reason is companies are trying to be prudent by holding on to whatever cash they have because of the uncertain economic times and there may not be enough retained earnings to carry them when hard times come.

Nevertheless, whatever the reason is, if this study on the relation of dividend pay-out to profit growth is true, then we will be into a period of declined profit growth for this year and the next year due to the global decline in dividend pay-out in these present times.

(For comments, please e-mail to: This e-mail address is being protected from spambots. You need JavaScript enabled to view it )