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In this regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.

Show me the money

Should your portfolio companies be paying you a Christmas bonus?

It’s that time of year when City folk begin to think about all things Christmas. The lights, the parties, the presents, and …….. their bonuses.

Well, this year there won’t be the extravagant parties of recent Christmases past as City firms seek to portray some sensitivity to people still suffering from the effects of the credit crunch (or should I say to avoid bad PR by being caught out). For example, F&C has decided to downgrade its annual party at The Dorchester for a low key event at a Chinese restaurant chain called Ping Pong. As far as bonuses go though, City folk I speak to (those still in jobs that is) are generally expecting a good round of bonuses as the gloom we saw at the start of 2009 has gradually lifted. Such bonuses, as we’ve recently seen in the debate on banks bailed out by the taxpayer, are claimed to be important for rewarding and retaining their staff.

In companies too, although it’s been a tough year, it was fairly well signposted when 2009 targets were being set so you may see management teams being awarded healthy bonuses for what appear to be fairly average performances. As Sir Martin Sorrell said recently at the AIM conference at the London Stock Exchange “Flat is the new up” and, to be fair, if companies have come out of 2009 relatively unscathed and set for growth in 2010 then those bonuses will have been well earned. Some companies of course will pay them anyway as we saw with the example of headhunting firm OPD earlier this year which despite poor results still paid two directors a combined bonus of £655,000. One of those directors was Baroness Bottomley who, with her political experience you’d expect to be in tune with public sensitivities. To compound matters further the board of OPD at the same time as awarding these bonuses also proposed that no dividend be paid with the results, having paid 6p per share the year before. All good for directors bonuses but not so good for shareholders.

Ash Mehta                        

Dividend Debate

But are companies you invest in going to be paying you anything for your support during 2009?  Will they be thinking about rewarding and retaining you as a shareholder?  Will you get a dividend from your portfolio companies?

The debate about dividends and whether companies should pay them is well covered elsewhere. The academics claim that a shareholder should be indifferent between dividends and capital growth and that if shareholders want “income” they can sell down part of their growing asset to release some income. Others claim that companies should pay dividends unless they can invest in projects for a better return than shareholders can get from other investments. But how many management teams do you know who claimed they couldn’t think of another good project they could do? We, shareholders, pay management teams because of their expertise and few management teams would acknowledge that they had run out of ideas for how to grow the company. Indeed there are many examples of management teams going of on expeditions of folly just to be busy and show activity by spending shareholders money when it could be better used to pay a dividend.  

The credit crunch has caused the dividend debate to come to the fore again. Why? Because, whilst many institutional investors late last year were saying they’d had enough of AIM stocks and would steer clear in future, many of the same investors are now returning to investing in AIM companies. What they want to see ideally though, are companies which are already revenue generating, at least approaching profitability, may pay dividends in future and, ultimately, many investors want to see that the company has a plan for at some point “graduating” to the Full List. So, the point about paying dividends isn’t that investors want cash returns every year but that paying dividends becomes a discipline for the company and a signpost towards the next step of moving to the main market. If this is an investment trend amongst institutional investors, then as private investors we also ought to take heed as the demand from those same institutions will in the long term have a significant impact on the price of shares we hold.

many institutional

investors are now

returning to investing

in AIM companies

Confidence Signal

From a company’s point of view dividends can also act as a useful tool to provide further signals to shareholders. A company which has had a tough year can signal its confidence for the future by maintaining its dividend and indeed many companies use their dividend growth in this way.

So, as a shareholder is it worth you seeking a Christmas bonus from your portfolio companies? Will the 2% or 3% yield make a difference to your financial well being in the same way as a City bonus? No probably not, but when you’re looking to see how well a company is run and what its prospects are for the future then the ability and willingness of a company to pay a dividend might mean that the bonus you get isn’t the actual dividend itself but the capital growth from selling shares in a well run company that is increasingly cash generative. You may have to wait until Christmas 2012 but if you’re investing in such companies it may well be worth hanging on for Christmases future for your bonus.

As a final thought, going back to OPD, if a company is paying healthy bonuses to its directors but not paying a dividend you might want to ask the company why it can afford one but not the other. I suspect getting an answer to that question will be a bonus in itself.

hanging on for

Christmases future

ash@orchardgrowth.com

Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.

 © Ash Mehta

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