Three reasons businesses are paying higher dividends rather than investing

Mar 7, 2017 | Securities

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”.

To read the full article, follow this link to thebull.com.au.

If you want to take advantage of record dividend payouts in the current market and earn up to 15% on dividends from safe, blue chip investments, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email info@ugc.net.au and learn about our market beating cash flow strategy.

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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.

<a href="https://ugc.net.au/author/joel/" target="_self">Joel Hewish</a>

Joel Hewish

Joel is the founder and CEO of UGC. He is a licensed financial advisor with 15 years experience assisting clients grow, manage and protect their wealth.

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