Dividends, yay or nay?

This week, the lecture focused on the topic of dividends. In the United Kingdom at the moment, the distribution of dividends is at an all-time high. £99.8 billion was distributed last year to shareholders, this was due to a number of favourable conditions in the market such as the slump in the value of the pound, as well as rising profits in firms. I think it is interesting that despite the uncertainty around BREXIT and what this could possibly mean for the economy, analysts predict that 2019 will also be a record-breaking year in terms of dividends. 

However, although dividends are on the rise, this does not necessarily mean each firm which paid dividends are performing well financially. For example, Hennes & Mauritz (H&M) disappointed their investors once again with a decline in profits, placing blame on the replacement of their logistic systems and activities which were in preparation for upcoming transitions (whatever that means).

A few years ago, I was definitely a fan of H&M’s clothing as I spent hours and hours trailing around a local shopping centre and searching through the rails. At this current moment that just isn’t the case as I simply go onto the ASOS app and a lovely Hermes driver delivers my parcel the very next day. I did order off H&M once but the website design and the whole online process just wasn’t the standard I would expect, which is most likely the reason why I didn’t use their service again. It’s fair to say, I am not the only customer to feels this way with H&M acknowledging their vulnerability to changes in customer habits, which includes the online shopping phenomena which they state has contributed to the inventory issues and consequently led to a 11% drop in profits.

Although the CEO has stated such reasons for their decline in profits and shares decreasing to a 10-year low, (which I also agree with) I think the main reason is due to H&Ms controversy at the beginning of 2018 where a young black child modelled a sweatshirt with the slogan ‘coolest monkey in the jungle’ which led to outcry among the general public as well as top celebrities calling for a boycott. This meant that H&M had to slash their prices down. But what does this mean for H&M’s shareholders and their dividends?

Well many expected H&M’s dividend policy to reflect the changes in their financials however they have chosen to stick with paying a steady dividend. This may be the firm choosing to signal to investors that the profit slump is only temporary and to avoid losing investor confidence. This could also link to the ‘bird in the hand’ theory which states that a business will prefer to issue dividends rather than causing worry among investors and that many shareholders prefer receiving a dividend. Which of course, I understand that by choosing not to issue a dividend this will just cause more hassle with shareholders worrying and most likely a drop in share prices and maybe it is the best decision for H&M to feed the hand of its shareholders.  But does this decision come at a higher cost?

Surely if H&M is facing issues with its financials this year, the business should focus more on innovation (particularly with its online shopping) and investing money into positive NPV projects rather than worrying about paying a dividend.

Modligiani and Miller stated that a dividend should be distributed once the profit generating projects have been invested in, but it is not clear whether this is the case for H&M. They also stated that a rational investor should be impartial to capital gains and dividends and would actually look at their investment policy to make a decision on whether or not to invest. However, I personally think that the problem with most investors is that most are not rational and are probably looking at what they receive now rather than looking at the potential long term. So, what should have H&M done, well to be honest I am conflicted.