A debate has begun over whether Australian companies are paying out too much cash in dividends to shareholders, and not enough capital is being reinvested. We think this is an extremely serious issue and is closely linked to Australia's future economic performance and the performance of local equity markets in coming years. But we also believe there is a lack of political and central bank will to address the issue. There are two main reasons why companies are choosing to pay out capital in dividends to shareholders rather than retain and reinvest that capital. Firstly, Australia's ageing population is creating strong demand from shareholders for increased dividends. Secondly, the slowing growth profile of the economy and the high $A means business aren't encouraged through return on capital to retain capital. Read more (VIEW LINK)
This is a really good piece guys - but surely it should not be a political/central bank issue as to whether companies invest/buy-back stock/pay out higher dividends. This should be something boards are more than capable of working out for themselves. As for the AUD - yes - pushing it lower will help some industries, but will hurt others - and import higher inflation. Furthermore - what can the RBA do other than slash rates further - with deleterious effects for savers - who will then in turn be forced to buy more stock - which they'll only do if the boards pay out higher dividends. Catch 22 no?
I agree with your sentiments Jordan, definitely a catch 22 situation. We are in this situation because companies/boards responded to investor requests. It was not just the mums and dads but also big funds. You can't blame them for responding to their investors. The best thing the Government could do is provide a solid political backdrop for corporates to invest against. Neither Govt. has been able to deliver this in recent history.