View from City Road: The flawed arguments on dividends

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The Independent Online
Fund managers must be feeling like the pariahs banks once were, given the way an unholy alliance of Stephen Dorrell, Treasury Secretary, and Robin Cook, Labour's trade and industry spokesman, is saying that companies dividends are too high.

According to Mr Dorrell, that excessive largesse is at the expense of investment in plant and machinery. And according to Mr Cook it is occurring because boardrooms are terrified that disgruntled shareholders will back a short-termist, hostile takeover.

No one knows quite where Mr Dorrell's ruminations, made in the context of a continuing review of taxation and savings flows, are intended to lead, although they are certainly a factor upsetting the stock market.

But Labour's paper, Winning for Britain, does come to a conclusion. The trouble is, it is seriously flawed. It argues that takeovers should only be allowed if they are proved to be in the public interest, rather than banned because they are against it.

The absurd result of this would be that poorly performing company managements could cut dividends to their hearts' content.

Dividend cover has fallen from a peak of 6 in 1979, before dividend controls were abolished, to 2 in 1993. But the suggestion that decisions on dividends take precedence over profitable investment projects is highly implausible. National under-investment is a macro-economic question that will hardly be solved by removing pension funds' remaining tax privileges.

Mr Dorrell should reflect that Mr Lamont's cut in the rate at which tax- free pension funds could reclaim advance corporation tax merely led to higher contributions to the pension fund and lower retained earnings.

Still, perhaps finding Mr Cook in his corner will persuade Mr Dorrell he is indeed on a hiding to nothing.