Three reasons businesses are paying higher dividends rather than investing

With low interest rates and record profits, why aren’t businesses in Australia investing for growth? Rather than investing in new projects, instead, they are giving cash back to shareholders in the form of record dividends and share buybacks. Why?

Well according to Professor of Finance Lee Smales, there are three key reasons for this:

1- Worries about the sustainability of commodity prices. Mining companies are reluctant to invest in new mines, in fear of price declines.

2- Commitment to a set dividend payout ratio. After a major investment cycle, many resource companies are sticking to promised dividend ratios. BHP, for example, is committed to pay shareholders at least 50% of profits.

3- Lack of investment opportunities. The decline in infrastructure spending at the state and federal level, for example, reduces the number of available investment opportunities with a good return on capital.

Political uncertainty might also be a reason for a hold back in investment. A Coalition government with little policy direction in Australia, increasing debt levels in China, and an unpredictable Trump administration in the US all contribute to uncertainty in the markets. In turn, this makes businesses more prone to increase dividends instead of investing.

As Smales puts it, “investors should enjoy the benefits of higher dividend payouts while they last”.

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The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation or tolerance for risk.

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