Page 129 - (DK) The Business Book

MAKING MONEY WORK 127

See also: Accountability and governance 130–31 ■ Who bears the risk? 138–45 John Kay
■ Ignoring the herd 146–49 ■ Profit versus cash flow 152–53
Professor John Kay is a British
economist born in 1948. Best
known for his sceptical support
for free-market business
behavior, he is a visiting
professor at the London School
of Economics and regular
contributor to the Financial
Times. In 2012 he presented
a detailed report to the UK
government on the stock
market, which emphasized
that the normal purpose
of stock markets is not
speculation, but to provide
companies with access to
capital and to provide savers
with an opportunity to share
in economic growth. He also
highlighted concern about
excess dividend payouts.
The Dutch East India Company the company for reinvestment? The
was the first public company to offer higher the company’s growth Key works
shares. Investors put up money for prospects, the greater the incentive
voyages in return for a share of the to keep money within the business. 1996 The Business of
profits made from successful trips.
Slow-growing companies should Economics
therefore pay out a high proportion 2003 The Truth About
In 2012, for example, Honda Motor of profits in dividends, whereas Markets
Company of Japan paid out just booming organizations are more 2006 The Hare and the
under half its $2.7 million profit in likely to keep the cash within the Tortoise
dividends, leaving just over half to business. There is no safer source
reinvest in the company. of capital than retained profit: it does
The first dividend payments not need to be repaid, nor does it Just two years later RBS was forced
were made in the 17th century by require the payment of interest. to ask shareholders to buy shares at
the Dutch East India Company, Another factor to consider is the 200p ($3.13) each, in order to raise
which was the world’s first company health of the company’s finances. £12 ($18) billion. Six months later,
to issue shares in exchange for If they are weak, profits should be those shares were worth only 65p
capital. To encourage investors to retained; only if the balance sheet ($1.03); three months after that, just
buy shares, a promise of an annual is strong should generous dividends 11p (¢17). The company’s generosity
payment (called a dividend) was be paid to the shareholders. in 2006 cost its shareholders dearly.
made. Between 1600 and 1800 the Dividend payouts must be In contrast, Apple did not pay
Dutch East India Company paid considered carefully. In 2006, the dividends from its formation in 1977
annual dividends worth around 18 Royal Bank of Scotland (RBS) until 2013. The directors, led by
percent of the value of the shares. declared a 25 percent increase in Steve Jobs, argued that shareholders
dividends to shareholders. Market would benefit in the long term by
Invest or pay out? commentators praised the move, allowing Apple to reinvest profits.
Dividend payouts are entirely the gift with one team of analysts issuing Only in 2013, with its growth rate
of the directors. Their decision is the note: “Thanks Fred [Goodwin, beginning to fall, did the company
simple: what proportion of after-tax CEO of RBS], we love you.” The announce dividend payouts, which
profit should be paid in dividends, dividend increase put money directly it projected would average $30
and what should be retained inside into the hands of the shareholders. billion a year until 2015. ■