Page 29 - DIY Investor Magazine Issue 24

29 DIY Investor Magazine | Apr 2020
It would enable companies to retain workers and invest prudently in difficult times, to emerge stronger into the upturn, without recourse to Government assistance.
Would this not be a more prudent model for the UK economy?
Less gearing on balance sheets does mean lower returns on equity. Whilst you might argue that lower but more stable returns could justify higher equity valuations, realistically this means lower earnings multiples and lower returns from investment in equities.
But after two monumental crises in twelve years, there has to be a re-think also on how economies and society can be better protected against such events.
Slow, gradual, mistrusted equity bull markets ending in crisis and collapse cannot be the playbook for the coming years again.
Americans are rightly asking how during the good times companies have bought back millions of shares – to the benefit of management – only to go cap in hand to the Government for a bail-out now.
‘AFTER TWO MONUMENTAL CRISES IN TWELVE YEARS, THERE HAS TO BE A RE-THINK’
Less leverage, less corporate debt, has to be a part of the solution. This needs a re-think at the highest levels of policy-making in Government and amongst Boards. Academia can come along later, once it has re-thought the Capital Asset Pricing Model.
If returns on equity are going to be lower with less leverage, then dividends are also going to be lower.
The payout ratio in the UK market has been rising steadily this cycle to levels where dividend cover looked dangerously thin.
Given the immediate level of uncertainty about the economic outlook, many companies are suspending dividend payments to protect their balance sheets.
This is prudent and sensible, though it is important that once the outlook is clearer, companies that can do so with good earnings cover, do resume returns to shareholders.
The stock market will take a dim view of companies which use the current uncertainty as a general amnesty to correct over-distribution or build headroom for future dividend growth.
Last year’s revised Corporate Code was a powerful step in trying to re-think corporate capitalism.
Its insistence that companies should have a purpose
– and not maximising shareholder value – but should take all their stakeholders into account in their decision- making was radical, in my view.
‘AN ENORMOUS MISSED OPPORTUNITY IF COMPANIES DID NOT USE THIS CRISIS TO RESET THEIR RELATIONSHIP WITH WIDER SOCIETY’