Keep the Shareholder Payouts Coming

SMITH BRAIN TRUST -- A surge of shareholder activism has fueled debate about how companies should balance dividend payouts with long-term investment, but an economist at the University of Maryland’s Robert H. Smith School of Business says the money gets reinvested either way. "The money won for shareholders does not disappear," professor Peter Morici writes in a national column. "It may not get spent on immediate consumption but often gets reinvested. And that's where the cash often comes from to finance the next Google, Fusion or Shapeways."

He says the economy wins when activist investors and institutional shareholders force publicly held companies to make dividend payouts. “Hedge funds and other restless shareholders are not dark angels but rather agents of progress for Schumpeter's creative destruction," he says. “And that's how capitalism is supposed to work.” 

New data reported by the Wall Street Journal reveals S&P 500 companies spent 36 percent of cash flow on shareholder payouts, up from 18 percent a decade earlier. Apple sticks out in this trend, boosting its dividend in April by 11 percent and increasing its buyback plan by $50 billion, to $140 billion. A Globe and Mail piece, “Hit-and-run shareholders like Carl Icahn eat at Apple’s core," argues the company is shortchanging R&D and compromising its long-term sustainability.

Conversely, the Wall Street Journal points to Apple’s “disciplined approach to R&D” and the company outperforming its competitors. Nokia, for example, outspent Apple by a 4-to-1 ratio over the decade starting in 2001 "but still ended up an also-ran in the cellphone market it once dominated.” Morici says the digital revolution is a difference-maker that greatly reduces the manpower, physical capital and overhead needed to design, manufacture and market products on a global scale, which allows companies to do more with less. Read his column at The Street.

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