The return of the dividend?

The following ?highlights? from a press release this week must surely make those of us at the sharp end of smaller company finance run from the room screaming obscenities and rush into the nearest public house for some solace:

“A partnership to create a new independent ?2.9m enterprise research centre that will help drive Government policy for SMEs in the UK has been announced. The Enterprise Research Centre will help develop a greater understanding of the factors affecting business investment, performance and growth. It is a joint collaboration between the Department for Business, Innovation and Skills (BIS), the British Bankers Association (BBA), the Economic and Social Research Council (ESRC) and the Technology Strategy Board. The call for proposals to form the centre opens today, and will close on 4 September 2012. Applications are welcomed from academic institutions across the UK with relevant expertise. It is expected that the successful bidder will be announced in the autumn.?

Angela Knight, chief executive of the British Bankers?Association, said: “Information is key to delivering investment and for targeting help and support where it is needed most. The British Bankers’ Association and major UK banks are delighted to support the Enterprise Research Centre, an initiative which will see research focusing on small and medium sized enterprises. ?We believe the insight we gain will help inform policy, provide a focal point for research, bring key knowledge together in one place and help banks better serve their businesses customers. We also hope the research will help policy makers, business organisations and investors to work together to further develop initiatives that support enterprise and the UK growth agenda.”

So, we have ?2.9m of our money wasted on a talking shop between our lame duck banks, who haven?t got the money (If you want further on this read Liam Halligan?s Sunday Telegraph article about the zombie bank malaise), bureaucrats indulging in yet another Quango and a bunch of academics who have no business experience whatsoever.

What do George and Vince have against talking to those who have actually spent a lifetime running SMEs and/or helping them raise capital? As a colleague of mine despairingly put it, ?we could collectively tell them the answer for the price of a good dinner?. George Osborne could even avoid that expense if he cared to ease on round to the ancestral home and ask his Father for views and suggestions. He at least has long experience of running an SME (Osborne & Little).

Of course I do not expect the Government to take heed of the City Grump, do another of its celebrated U-turns and can this Quango in the making, but perhaps they and the readers of this column might like to think about the following:

Xavier Rolet, the CEO OF the London Stock Exchange, said this week, ?Equity was invented here but today it?s become effectively an almost dead asset class.??

How true. Why so and what can be done? This happened due to a deadly combination of ever increasing regulation over equity investing (as opposed to other forms of capital with little or no regulation) and an insistence that the income stream from government bonds is the most reliable way of meeting the requirements of policyholders,?by the actuarial advisors to our pension funds and insurance companies

When I started in investment management back in the 1970s, the prevailing view was that the way to value a company was through its dividend stream. In other words, companies that paid dividends were more valuable than those that didn?t. Companies that paid a rising dividend every year where the most valuable of the lot. Thanks to the actuarial advice outlined above, that approach went out the window years ago.?

Now, so-called ‘growth companies’, especially SMEs, have been able to hide behind the ?we don? t need to pay out dividends to our investors because we can better employ it in our business? tack. Imagine trying to suggest that as a reason to your banker, for why you shouldn?t pay any interest on that loan.

I sense the pendulum is beginning to swing back. UK government bonds now provide the lowest income since records began in the 18th Century. Until recently the US technology sector paid negligible dividends. Goldman Sachs predicts dividends of US technology companies will double again in the next two years, making the sector the biggest contributor in S&P Index. Investors are desperate for income and will look increasingly favourably on any companies they think can provide them such.

I know this defies conventional wisdom, but if you are running a small or mid-sized company and are beginning to despair of attracting investment, then think hard about how your business can generate a dividend stream. You?ll find investors beating a path to your door and then the ?2.9m Enterprise Research Centre can shut up its talking shop.

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