Thursday 16 October 2008

Bailout or dividend?

I have a modest share holding in a few companies (Remember to Tell Sid!) but have always thought that there were two elements to shares, capital growth and dividend income. A company that ploughed its profits back into developing and expanding the company increased its capital worth and a company that distributed the majority of its profits to the shareholders paid bigger dividends. Of course this is a very simplistic view. What I was very clear on was that dividends were distributed profits. No profit meant no dividend. No profit also mean no money to re-invest in the company and so ultimately also long term meant no more company! I have no problem with companies making profits! Profits are what makes everything possible.

However, the capital growth element of shares in reality has no bearing whatsoever on the asset value of the company. A company can have a share value running into millions of pounds but zero physical assets (anyone remember the dot.com share boom and bust?). The only time a company receives any money from the sale of its shares is the first time they sell them to the market. After that it is the trader and seller of the share that gets the money, not the company.

If a company's share price doubtless the company don't get a extra penny, it is the shareholder who gets the money, similarly if the share price halves the company don't have to pay out, its the share holder who losses the money. So what controls the value of shares? I thought it was the value of the company but its nothing to do with how much a company has in terms of physical asserts, its actually controlled by the size of the dividend they pay out! The bigger the dividend the higher the share value! So if there are no dividends from shares for 5 years then the value of shares to traders is zero for five years! The fact the share value is zero doesn't mean the company has any less physical assets, have any less cash, have any fewer orders or sales. A company can have huge physical assets but if its not paying dividends then its share price is low. Of course if the share price falls below the value of the physical assets then the assets strippers move in, buy all the shares, gut the company and sell off the physical assets.

Trading of shares is a cornerstone of capitalism but in actual fact is a totally parasitic operation that contributes nothing material to the world, its just one huge casino where the traders play with other people's money and bet on share prices going up or down. When people go to the races and bet on horses and lose the government don't step in and refund the lost money. If a bookmaker took bets at odds he couldn't pay out on then when he ran out of money he goes bust.

Which brings us to Bank Share Values and Dividends. The banks have all made huge losses and are relying on taxpayers money to bail them out. The shareholders are now complaining that there will be no dividends until the taxpayer is paid back. Well that seems fine to me. There have been no profits hence no dividends. The shareholders took the gain in the good times and so now they take the pain in the bad times. If they don't want to hold shares for years without dividend then sell them, they will get peanuts for them but that's the risk they took when they bought them. The value of your investments can go down as well as UP!

The government should stand firm. No taxpayer's bailout money for shareholder dividends. Nor should there be huge bonus payments for as long as there is public money in the banking system. Up the Workers!!!

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