- Capital markets are not always open and accessible: In utopian corporate finance, a company with a good investment opportunity, i.e., one that earns more than the cost of capital can always raise capital from equity or debt market, quickly, at a fair price and with little or no issuance costs. In the real world, capital markets are not that accommodating. Raising capital can be a costly exercise, investors may under price your debt and equity, and the process can take time. It should come as no surprise then that if a company pays too much in dividends in this setting, it will find itself rejecting good investments.
- Banks may be the only lending option: For many companies, the only option when it comes to borrowing money is to go to a bank, and to the extent that banks face their own constraints on lending, companies may be unable to borrow at what they perceive to be fair rates. This will effectively play out in both investing and financing decisions.
- Dividends are sticky: If there is one word that characterizes dividend policy around the world, it is that it is "sticky". Companies, once committed to paying dividends, are unwilling to either cut or stop paying dividends, for fear of market punishment. That stickiness translates into companies continuing to pay dividends, even as earnings collapse and/or investment opportunities expand.
- Once mature, companies will return more cash over shorter periods: The intensity of both the growth and the decline phases, with compressed life cycles, will mean that companies will become larger much more quickly than they used to, both in terms of revenues and earnings, but once they hit the "growth wall", they will find investment opportunities shrinking much faster, thus allowing for more cash to be returned over shorter time periods.
- Those cash returns will be more likely to be in buybacks or special dividends, not regular dividends: The sweet spot for conventional dividends is the mature phase, where companies get to enjoy their dominance and rest on their competitive advantages, with large and predictable earnings. With the life cycle shortening and becoming more intense, this sweet spot period has become much briefer. Think of how little time Yahoo! and Blackberry got to enjoy being mature companies, before decline kicked in. Even the rare tech companies, like Microsoft and Apple, that have managed to extend their mature phases have to reinvent themselves to keep generating their earnings, making these earnings more uncertain. Paying large regular dividends in this setting is foolhardy, since investors expect you to keep paying them, in good times and bad.
- Companies that fight aging will see bigger cash build ups: No company likes to age, and it should not come as a surprise that many tech companies fight the turn in their life cycles, deluding themselves into believing that a rebirth is around the corner and not returning cash., even as free cash flows to equity turn positive. At these companies, cash balances quickly balloon, attracting activist investors.
Sub Group | Number of firms | Dividends | Dividends + Buybacks | Buybacks as % of Cash Returns |
---|---|---|---|---|
Africa and Middle East
|
2,277
|
$65,767
|
$70,530
|
6.75%
|
Australia & NZ
|
1,777
|
$50,194
|
$56,034
|
10.42%
|
Canada
|
2,850
|
$49,544
|
$80,470
|
38.43%
|
China
|
5,552
|
$317,678
|
$342,282
|
7.19%
|
EU & Environs
|
5,399
|
$320,027
|
$514,279
|
37.77%
|
Eastern Europe & Russia
|
558
|
$21,761
|
$23,522
|
7.49%
|
India
|
3,511
|
$20,701
|
$27,121
|
23.67%
|
Japan
|
3,755
|
$101,760
|
$134,087
|
24.11%
|
Latin America
|
880
|
$40,395
|
$47,907
|
15.68%
|
Small Asia
|
8,630
|
$128,066
|
$148,607
|
13.82%
|
UK
|
1,412
|
$101,605
|
$128,161
|
20.72%
|
United States
|
7,247
|
$486,009
|
$1,049,487
|
53.69%
|
via chartsbin.com
Download full sector data |
Cash Balance
There is one final loose end to tie up on dividends. If companies don't return their FCFE (potential dividends) to stockholders, it accumulates as a cash balance. One way to measure whether companies are returning enough cash is to look at cash balances, scaled to either the market values of these firms or market capitalization. The table below provides the regional statistics on cash balances:
Sub Group | Cash Balance | Cash/Firm Value | Cash/ Market Cap |
---|---|---|---|
Africa and Middle East
|
$490,475
|
16.13%
|
24.43%
|
Australia & NZ
|
$175,578
|
6.43%
|
11.37%
|
Canada
|
$183,204
|
4.66%
|
8.10%
|
China
|
$2,724,851
|
12.84%
|
21.16%
|
EU & Environs
|
$2,935,769
|
11.85%
|
22.43%
|
Eastern Europe & Russia
|
$112,480
|
15.08%
|
24.34%
|
India
|
$99,190
|
3.31%
|
4.18%
|
Japan
|
$4,185,572
|
34.47%
|
67.73%
|
Latin America
|
$239,664
|
7.84%
|
13.06%
|
Small Asia
|
$841,230
|
9.91%
|
15.19%
|
UK
|
$1,087,286
|
15.80%
|
29.48%
|
United States
|
$2,206,548
|
4.73%
|
7.52%
|
Conclusion
- Dividend, Buyback and Cash Balance statistics, by Country
- Dividend, Buyback and Cash Balance statistics, by Sector
- January 2018 Data Update 1: Numbers don't lie, or do they?
- January 2018 Data Update 2: The Buoyancy of US Equities!
- January 2018 Data Update 3: Taxing Questions on Value
- January 2018 Data Update 4: The Currency Conundrum
- January 2018 Data Update 5: Country Risk Update
- January 2018 Data Update 6: A Cost of Capital Primer
- January 2018 Data Update 7: Growth and Value - Investment Returns
- January 2018 Data Update 8: Debt and Taxes
- January 2018 Data Update 9: Dividends, Buybacks and Cash Holdings
- January 2018 Data Update 10: The Pricing Prerogative