The bull run was still young. But, it had enough pull to drag outsiders like me to the markets. My company decided that people on its rolls would do better with a class on ‘How to read financial statements.’ It chose an IIM professor.
Professor Sundy had a very radical perspective. He expanded GAAP (Generally Accepted Accounting Principles) as ‘Games All Accountants Play.’ He called equity investors fools and named equity shares the greatest con in global corporate history. “You give the money. You can’t ask for any return. You can’t even ask them to pay it back. If they decide to close the company, they will pay back only if something is left after paying everybody else. If not a con, what is it?”, Sundy asked.
Most of the class laughed it off. But, the idea stayed with me and has helped me put things in place whenever producers and marketers of equity products have bombarded me with the virtues of equity. Most of them had a single point: Capital appreciation. And, when prices were clearly high, they came up with new valuation methods that always made the stock(s) look cheap.
The pitch worked well and Sundy looked like an old cynical man. A fateful day in January 2008 changed that. Since then, Sundy has been growing in stature and the Street downhill. Which is why I was surprised when senior broker Raamdeo Agrawal recently came up with the idea of a ‘minimum dividend obligation.’ It turned Sundy’s theory on its head and was pregnant with possibilities.
Promoters, who hold majority and control decisions on dividend payments, have several alternatives to reward themselves. Minority investors, who have none, are often left looking at the ticker for returns. Recently, one large company did not pay dividends even after selling off the business and making a huge profit.
Agrawal pointed out how, at an average of 12 per cent, even the largest company’s dividend track record was not that great. Smaller firms were worse, he said.
But, this can be changed. Some countries already have laws to make companies commit minimum dividend rates at the time of initial public offerings. For example, Brazilian companies have to pay a dividend of 50 per cent.
The government has been pushing companies owned by it to pay more dividends. It will only be fitting if it helps enact rules that would extend the benefits to the less powerful minority across the listed universe. It is high time the powers-that-be explored the possibility of making it obligatory for listed companies to declare dividends every year.
If this happens, Sundy will be proved wrong.
He wouldn’t mind, though. Till then, Indian stocks will continue to defy a 73-year-old axiom coined by John Burr Williams. In his theory of investment value, the broker-turned-author said, “A cow for her milk, a hen for her eggs, and a stock, by heck, for her dividends.”
