Question of the week
Through their activity and sales, and once all their expenses are paid, companies generate liquidity that allows them to invest. Once these investments have been made, there may still be some liquidity, which can be used for various purposes: to repay debts, to acquire other companies, or to make dividends payments, which constitute a transfer of the company’s cash to its shareholders.
But the company’s distribution of liquidity correspondingly diminishes its stock market value. Thus, a company whose value is 100 and which pays out 5 in dividends, see its value reduced by 5 once the dividends are distributed. There is thus no creation of wealth by the mechanism of the payment of dividends: it is a simple transfer of liquidity from the company to its shareholders.
Dividends payments thus do not correspond to the remuneration of a company’s shareholders. The only wealth created by this operation is for the State, since this distribution will occasion taxes. In France, and assuming the simplest situation of physical persons, the taxes and social security charges on the dividends are ordinarily 30%. In our example, the State will collect 1.5 (30% of 5), while the shareholder will only get 3.5, losing 5 in capital.
Dividends can nonetheless be of interest to shareholders if they need liquidity and are indifferent to variations in the price of their shares. Pension funds and insurance providers, for example, fit this profile. Professional investors behind LBO (Leverage Buy Out) operations may also need dividends to repay part of their acquisition debt. Finally, dividends offer certain individuals a revenue supplement, or even remuneration in the case of business executives who pay themselves nothing (or very little) in salary.
Thus, focusing on dividends as the heart of the shareholder’s remuneration is an error. For the shareholder, dividends are in fact just a way of exercising her/his right of property.
See also: https://latribune.lazardfreresgestion.fr/en/how-can-you-tell-if-a-stock-is-expensive-or-cheap/
The opinion expressed above is dated 13th May 2021, and liable to change.
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