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.
