When a cash rich company refuses to pay handsome dividends, nor does it undertake share buyback, then there could be two possible reasons:
- The company’s management may be accumulating cash for a major acquisition or an internal expansion plan.
- The management is downright ignorant and lethargic, though the probability for this is extremely low and remote - such a management will not be able to generate so much cash in the first place.
Even when the company is planning a major acquisition or expansion, it is not justified in not paying handsome dividends to the shareholders. For after all ‘Dividends are the Wages of Investors’ and, the investors should relentlessly pester the management to pay more dividends. This is what Warren Buffett does. He attends the annual general body meetings of the companies in which he has investments and exerts pressure to pay more dividends.
The argument that the company is holding on to cash for a major acquisition or expansion also does not hold any water for history shows that many such acquisitions/ expansions were designed more to pamper the egos of the Chairman or CEO and destroyed precious capital; in a few rare instances top managements had undertaken acquisitions in downright self interest, as their pay is invariably linked to the turnover (top-line) of the company rather than to net profit (bottom-line). In such situation, investors / shareholders are the ultimate sufferers.
In conclusion, not paying handsome dividends in the face of continuous surplus cash generation, for whatsoever reasons, is totally unjustified. The shareholders have to be always vigilant and ensure that ill-conceived acquisition plans are shelved. They should always keep the directors on their toes and constantly pester them to pay more dividends.