(BFM Bourse) – Contrary to the refrain that claims that dividends are (indecent) gifts offered to shareholders, in the strict sense no one has ever enriched themselves by receiving their share of a company’s profits in cash. due to him – since the value of the share decreases accordingly. The reasoning is indisputable, but how do you explain that the quest for dividends remains a popular strategy?
Never will global companies have distributed as many dividends to their shareholders as in 2021, according to the annual report of asset manager Janus Henderson, which like every year makes headlines and is the subject of more or less objective conclusions. However, the payment of a dividend does not enrich the shareholder in the strict sense.
A dividend represents a portion of the company’s wealth that it chooses to pay directly to its shareholders. A company (listed or not) can choose to distribute cash, the best known case, but also make a distribution in kind, for example by allocating to its shareholders shares in one of its subsidiaries, as Vivendi has done by distributing Universal Music Group titles to all its holders – giving them the choice of remaining invested in the field of music publishing or reselling them to obtain cash.
The amount that it is possible to distribute is framed by statute (each company often obliging itself to set aside an incompressible part of the profits it makes if necessary). The board of directors proposes an amount, which must be approved by a vote of the shareholders at the general meeting of the financial year concerned.
The dividend is attached to the ownership of a share and each share held gives the right to receive the same amount, regardless of who owns it. In certain cases, the seniority of ownership entitles you to an increase, for example an increased dividend of 10% for each share held for at least two years.
But it must be understood that when a dividend is paid, the shareholder receives in one pocket what he loses in the other. “At the time of the detachment of the dividend, the company loses in market value what it gives in cash”, explains Pascal Grandin, economist and professor at the University of Lille. That is to say that the price is recalculated on the day of the secondment by the stock market operator, taking the price of the day before minus the amount paid. In other words, at time t the shareholder has in his pocket a share worth (X – the dividend) to which we add the dividend, instead of having a share worth X.
Avoiding the “regret aversion” bias
In theory, financially the dividend has no particular interest for the investor: it amounts to the same thing to resell part of the shares of the company in question and pocket the proceeds of the sale to obtain cash. But in many cases, this is simply more practical (moreover, the fact of receiving a dividend or pocketing a capital gain does not necessarily generate the same tax treatment, depending on the regime of the person who receives it, the country of taxation etc. one may be more interesting than the other). With dividends, shareholders get cash, which is easier and quicker to use, without having to sell their stock, which avoids the so-called “regret aversion” bias. .
“Receiving a dividend is a way for shareholders to receive money without having to make the decision to sell their shares”, explain Sabrina Chikh and Pascal Grandin in an article published by Skema Business School. “If, to meet his liquidity needs, he had had to sell his securities, his feeling of regret would have been all the more intense in the event of a subsequent increase in the value of the security”. This regret is felt even more in this case than that provided by the fact of not having reinvested the dividend (all studies show that over time it is more interesting to reinvest the dividend immediately than to receive the cash). “Regret by omission is always less unpleasant than regret by commission!”
“Mental accounting” – the set of cognitive operations that we use to organize, evaluate and deal with financial problems – thus favors, in strictly equal amounts, what is paid to us (“passively”) rather than what results from a sale transaction (carried out “actively”). “We treat our income differently depending on where it comes from,” note Sabrina Chikh and Pascal Grandin. Receiving dividends gives us the feeling of being able to collect capital income without touching the capital.
A sign of good financial health
Finally, and above all, if the dividend does not enrich the shareholder, it acts as a powerful signal effect: indeed all companies – far from it – are not able to distribute dividends. By definition, it must be in good enough financial health to do so. The yield of the dividends of the companies which pay them makes it possible to compare them with each other, which creates a form of emulation encouraging them to manage as best as possible in order to attract more shareholders.
Over time, investing in fairly solid companies is still the easiest way to get rich on the stock market and a regular ability to pay a dividend is and will remain one of the best indicators of financial performance.
In addition, institutional investors and the wealthiest individuals can thus reinvest the money paid by companies that are sufficiently established to distribute part of their cash flows by betting on growing companies which, on the contrary, are net consumers of funds to develop, and thus enable the development of the economy.
Dividends reinvested… in other companies
The dividend only appears once the company is mature: “At the start of its life, it needs equity to develop. All the money earned will be reinvested”, explains Pascal Quiry, professor at HEC and co -author of the Vernimmen letter. On the other hand, once the phase of strong growth has passed, and a critical size has been reached, “it will no longer be possible to grow by 15% per year. The additional investment has a diminishing return”, which means that the use of the company’s own funds no longer brings him as much. This “leads to waste, and you can’t diversify into just anything”, continues Pascal Quiry.
Large companies rarely call on the savings of their shareholders and generally hold more money than their development requires. Shareholders who receive this money in the form of dividends can reinvest it in companies that are in their early stages of development. “The dividends of some are the investments of others”, supports Nicolas Marques, director general of the Molinari institute.
The payment of dividends is therefore one of the basic mechanisms that allows market economies to operate efficiently, to the benefit of all players.
(With AFP)
Guillaume Bayre – ©2022 BFM Bourse