Maybe I'm not understanding something but why do they consider paying dividends as something bad? They are essentially excluding the majority of businesses using this criteria.
There's a lot of misinformation about this out there.
The article does a bad job at explaining it, but companies that take aid cannot pay dividends or buy back stock until they return the aid.
This is so that aid is not redirected into the pockets of shareholders and is instead used to keep people employed.
>The Government and all parties to the Parliament agree that the extended and extended fixed cost scheme introduces a condition in the Compensation Orders that applicants, as a condition of receiving compensation for the extended period, must declare by faith and laws, that the companies will not pay dividends or buy back shares for the financial years 2020 and 2021. The condition will apply to companies that receive more than DKK 60 million. in compensation in 2020 in the compensation scheme for fixed costs. Companies will later be able to free themselves from these restrictions by repaying paid aid under this scheme in excess of DKK 60 million.
TARP in the US worked exactly the same way with the banks, BTW. Banks which took TARP money had their dividends reduced to a penny per share maximum until the money was repaid. Here you can see that for Bank of America, it took until 2014(!) for their dividend to go above that:
So why don't these conditions apply to all the aid, not just the aid after 8.8 million dollars?
Otherwise it seems ripe for my company to claim 7 million dollars of aid as unsecured loans, then pay out nice big dividends claiming you are in a strong financial position because you are forecasting lots of business next year, then in 2 years time when the loan repayments become due, go bankrupt.
I don't know if Denmark has similar laws but here in the US there are a lot of family businesses that have many family members who aren't officially on payroll. They're not doing anything shady because there are lots of exceptions to underage labor and minimum wage laws for family businesses. The businesses pay the owners (one member from each household usually) dividends who then distribute to the rest of the family. Many of these businesses are run by large families with strong ties with each other and their communities who act as their own social safety net. Many of them are also immigrants with a disaster mentality so they are the ones most likely to have a large nest egg for hard times. Excluding them from the loans because of their capital structure would be disastrous.
I think the $8.8 million is too high out of an abundance of caution but I can see the reasoning.
The implication is that companies should not be using the aid money to pay dividends or buy back stock, because the aid is intended to help pay employees or otherwise remain operational, not to pass through to stockholders.
The article doesn't make clear whether they're using past behavior (what they did with previous government aid), present behavior (are they currently a public company established as paying dividends), or future behavior (an agreement not to pay dividends or buy back stock, in order to receive aid).
If a company goes “Omg, we won’t make it this year, we need 2 billions in aid just to keep going with business as usual, not even takeing our normal 10% growth into account!?” then the government will still not pay a dime to that company if their “business as usual” includes 15 billion buy backs.
The point is that companies need to take the hit on their owners and shareholders pockets first, and only then if they still need aid to survive, then the government steps in.
I think of it more as somebody trying to hold a raft together, spread-eagled on the deck hanging onto the mast, the tiller, the log decking, hoping the storm passes and it all hasn't broken up yet.
It sounds like you may be assuming the dividend is required, like a debt. It isn't. A company can stop paying its dividend at any time, so Denmark isn't excluding any company. Investors will grumble when the dividend stops, but so what? The taxpayers are grumbling too.
Of course some banks have recently argued that their dividends are something like debts. They argue that cutting the dividend would cause investors to panic, so they must be essential to the financial system. This is a weird argument, but if you took it seriously you would have to include dividends in their post-2008 stress tests. You would require regulatory approval before they increased the dividend, as you would if they increased their debt-to-asset ratio.
Dept payments before dividends is just a one way for a lender to secure their loans in limited companies.
It counters "Heads I win, Tails you lose" -strategy where the risk of business is offloaded to lenders while owners take profits. It's common tactic in distressed companies to load the company them with debt and suck the firm try with huge dividends. Lenders are left with nothing when the company goes bankrupt.
It's probably a bit more nuanced than that. Dividends are often scheduled months in advance, based on (for instance) last year's profits. Having made a profit last year, and having promised a dividend months before corona doesn't mean you won't be struggling now.
So, the business then has the choice to use last year's profits to keep the business afloat or pay investors. Seems like an easy choice unless your only motivation is lining investor pockets.
I've never once met a person who would otherwise go hungry if they didn't get dividends, have you?
What you really mean is those "normal people" would have to sell their third car or maybe rent out their summer home without that dividend, which is just fine by me.
I know a bunch of retirees who live modestly off of dividend income, couldn’t afford a significant cut and couldn’t easily return to work. I don’t think you have broad enough experience to assume no one earns a few thousand a month from dividends and needs most of it to help pay bills.
Indeed. The fallacy that all investors are all fat cats, swimming in money is pretty galling. When interest rates on savings accounts dropped, many regular folks took some of their savings and put into dividend paying companies. I'm sure most of them are aware that this is an investment and isn't without risk. I'm certainly not advocating for companies to pay out dividends no matter what. But the lack of nuance bothers me.
Not all dividend paying companies are greedy, and not all dividend investors are wealthy.
It's actually way simpler than that: the owners of a company facing crisis have the choice between providing it with additional liquidity or putting its future (and thus their stake) at risk. This is the one core manifestation of the risk they are bearing, and for which they allegedly deserve the dividends in the first place.
Getting a dividend for last year's performance is the opposite of providing liquidity. If they get the cash because it was scheduled, they need to immediately put it back.
If they take the cash and run, they failed to act in their own interest, and do not deserve to have their investment protected.
To my knowledge, it isn't. There is a date of ownership where the dividend eligibility is determined and then it is paid out a few weeks later. I would imagine those payouts are binding but a planned dividend for June could easily be rescinded without legal penalty. However it is priced into the value of the stock. Slashing dividends will tank the stock price.
Eliminating a planned future dividend by itself would have no effect on the stock price. What would affect the stock price is the management explanation that comes along with cancelling the dividend. If they say that profits will drop even more than analysts had expected, then that would tend to cause a share price decline as it would be new information to the market.
Stock prices usually drop after a dividend is payed out because each share now represents a claim on fewer assets.
Paying a dividend is paying a person. It's like you're saying that 'as long as they can afford to keep paying employees' they don't need aid. Would you rather they stopped paying people but didn't take aid? The whole point of the aid is so they can keep going and keep paying people.
Most workers who receive majority of their income in the form of stock are in a very high income bracket and should not receive any government bailouts directly or indirectly.
> Many workers are paid a majority of their income in the form of stock from the company they work for.
A very small "many." I'd imagine that class consists mostly of highly-placed executives (who can be assumed to be rather wealthy) and some number of people playing the startup lottery.
I think at many large enterprises getting paid in stock is standard for even junior line-worker hires. Google, Microsoft, Amazon, Oracle, etc. People a few years into their career are often paid a majority in stock.
> I think at many large enterprises getting paid in stock is standard for even junior line-worker hires. Google, Microsoft, Amazon, Oracle, etc. People a few years into their career are often paid a majority in stock.
Maybe at FAANG companies (whose FTE workers tend to be very well off) and some other companies with a startup lineage, but I highly doubt this is very widespread.
I, for one, would frankly refuse a compensation package that was majority stock, unless the salary was already good. It'd be too much like those Enron employees who filled their 401ks with Enron stock -- too many eggs in one basket.
If someone who's otherwise well-compensated complains about missing out on dividends on their stock, I have the world's smallest violin here, ready to play a song for them.
You suggested paying a dividend was similar to paying employees. When throwaway2048 challenged this, you brought up stock-based compensation. Surely if such compensation (including dividends) was an obligation in the same way as wages, then the employee would have some recourse when it's interrupted. In other words, they could sue.
> Then, Like I said, its nothing like salary, which is absolutely an obligation.
But I'm never argued it was a salary or an obligation. Literally never used either of those two words. I think you're arguing against something nobody said.
It's money you'd be paying a person. It doesn't matter if it was 'like a salary' or an 'obligation' or not. What difference do you think that would make? Preventing companies paying dividends is prevent them paying people. Real people!
Not sure if these are loans or grants or exactly how it works, but I could see prohibiting dividends for some period after the aid. Firms should not be making distributions when they are receiving aid. But prohibiting any firm that has paid dividends is insane.
Dividends are, literally, the profits you're distributing to your owners. Buybacks, likewise, are giving corporate money directly to your owners (who then divest from the company in the process, of course). This isn't "bad", it's fine. It's the basic idea of how the stock market is supposed to work, we buy shares in companies we think will make money.
But by definition if you have cash to distribute to your owners, you could be using that to pay salaries instead and delay or avoid layoffs and furloughs. So it's very reasonable that a government bailout policy designed to prevent job losses (and not to shore up shareholder value) would incentivize giving money to the people who are targetted and not shareholders.
The thinking goes:
A business should have enough cash to weather a storm. If you've paid out cash you have more than enough to weather a storm (and therefore don't need money). If you need money and have paid out dividends than you shouldn't have, you didn't have enough cash reserve.
I’m Danish so I can chip in who this is targeted at. A few of our larger corporations like Danske Bank (the one from the money laundering scandals) aimed at paying out its stock owners 8,50dkr per share while simultaneously planning to fire hundreds of employees to pay for their mishaps and Covid problems. Other companies that are less evil planned similar things.
Now Danske Bank is planning on using those money to secure their business going forward, and we expect some companies to follow this route. Others will go a head with their firings, like Vestas, to make sure share holders get richer.
Now this is not something we actually want in Denmark. I know it’s capitalism, but our most recent election results showed a record support of our social democracy. We’ve never had less support for liberalism (which is our branch of capitalism) than we do now since the end of WW2. So we value people keeping their jobs above shareholders making money.
I personally think we should be even tougher on taxing the rich. If we know companies sit in tax-havens then we should really do something about that, shouldn’t we
You are correct that the vast majority of publicly traded companies do not pay dividends.
However, that is a small minority of all firms and I hope you will find it interesting to learn that many, many small firms' owners (Doctors offices, car dealers, liquor stores, carwashes, etc.) take regular compensation in the form of dividends.
Further, I will point that in the United States, if you are an "S Corp" (and millions are) you cannot, for the most part, carry over liquid cash from one year to the next. You are forced to distribute any leftover cash, typically in the form of distributions to owners (dividends).
That being said, receiving state aid on condition of suspending dividend payments makes very good sense and is the first condition I would add to such aid - you shouldn't need state aid if you are distributing profits.
Why do a majority of publicly traded companies not pay dividends? I've noticed before that for many companies by identifier (ISIN, SEDOL, CUSIP, take your pick) that there are no dividend histories.
The only example that I know the reason why is Amazon. [If you buy Amazon stock you either 1) expect dividends at some later stage or 2) plan on selling the stock for a higher price.]
Some companies 'reinvest' profits in their operations and don't pay dividends.
Others avoid dividends, as dividends are profits that are taxed twice. (Once for corporate income taxes, and again for individual income taxes.)
Selling the stock for a higher price has opportunity for favorable tax treatment at the lower long-term capital gains vs dividends taxes as regular income.
> Selling the stock for a higher price has opportunity for favorable tax treatment at the lower long-term capital gains vs dividends taxes as regular income.
Dividends are generally taxed at the long-term capital gains rate, not as ordinary income.
This makes sense to me for private or public companies where the owners are also employees or otherwise benefit. It doesn't necessarily make sense for me if you are a very small stakeholder.
I haven't read the law, but I would be surprised if it excluded the Danish equivalent of K-1. That would not make sense, it's a completely different thing.
Right, and I believe roughly half of the Russell 3000 constituents pay dividends as well. Given that the Russell 3000 represents about 98% of all U.S. equity market capitalization, is there a sense in which the statement:
> You are correct that the vast majority of publicly traded companies do not pay dividends.
My original point was that the vast majority of _companies_ don't pay dividends, not that most _public_ companies don't. I'm not sure where that came from.
Someone else made the comment that plenty of private companies pay "dividends" (e.g. USA K-1), but a cursory read of the Danish policy indicates that these private dividends are probably not affected.
You pay out dividends or buy back shares if you have surplus cash, and it's hard to convey to voters that businesses with surplus cash need help I guess.
