Lately in the Finnish media there has been talk going on about whether companies should be paying dividends during this ongoing pandemic. I’ll chime in with my two cents on this topic.
Who Gains?
The controversy regarding dividends during this crisis stems from the argument that it is “wrong” to pay dividends while simultaneously having large lay-offs. I can understand this perspective, but this type of criticism is not new. Frequently, the news is steered in a way that shows someone gaining numerically a lot, while another party is worse off. The assumption thus is that someone’s gain, automatically comes at someone else’s expense. I don’t deny the existence of this element, but you shouldn’t be automatically drawn to this conclusion at every turn.
The arguments against dividends under these circumstances seem to be targeted at banks. Since dissecting financial statements of banks is far outside my circle of competence, its hard for me to comment on their liquidity or default risk. Fiat currency and the engineering of printing money out of thin air is controversial itself. The Fed for example recently commented that they have endless cash and can print money indefinitely, exposing their open secret out loud. If money can be printed without consequence and loaned to government (with interest), who’s in charge? The Fed or the US government? The system works if people believe it works.
Government “Competitiveness”
The previous paragraph digressed slightly from the topic of dividends, so let’s revert back and discuss government owned companies in Finland. If the government is the majority shareholder, they decide on the dividend policy. As is the case with any firm’s controlling shareholders. The government usually proves it’s impotence in a competitive market by default. A few months ago, our finance minister suggested (article in Finnish) implementing a “European” internet browser and operating system. A nauseating idea that no one (except perhaps Brussels bureaucrats) is asking for. The Finnish government is the majority shareholder of Finnair, which has announced that it won’t pay dividends due to the pandemic. Considering the airline industry’s hardships even without the ongoing oriental “Batatouille”, I feel sorry for Finnair. Dividends or not.
But of course, a good business and a good investment is not always the same thing. Price is key. If I could get Finnair for a few cents on the Euro, or less than the scrap value of the planes, my margin of safety would be huge. And dividends alone should not be a reason for owning a company. This post gives better perspective on what to think about when considering dividends.
Conclusion: Fiscal Responsibility
Know what you own, and its financial state before buying a stock. A healthy balance sheet is sound corporate fiscal policy, and during crises like the current one, debt becomes the famous knife on the steering wheel. Even if you buy leveraged companies, make sure the debt is manageable, and incoming cash flows are strong and diversified. Or, you may turn biblical after the crisis and follow the quote below:
“Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.”
Market crashes are inevitable, and I’m certain new pandemics will at some point show up. Stay safe, and if you can, take advantage of the bargains Mr. Market is giving you at this time.
-IGTSKasimir
Further Reading
Warren Buffett – The Partnership Days (1956 – 1969)
Philip A. Fisher – Lessons From The 15% Man
The Best of Ben Graham – Security Analysis
Phil Town – The Compounding River Guide
Margin of Safety – The Most Important Thing
Intelligent Investing = Thinking In Probabilities
The Emotional Stages of a Value Investor
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