FINANCE AND INVESTMENT
By NICHOLA S DAVENPORT • IT distresses me to find my financial col-
leagues justifying the increases in bank dividends on the grounds that for the average shareholder the dividend warrant today has only one-third of its pre-war purchasing power while the average wage- earner is getting a pay packet worth one- third more than before the war. The question of social justice is beside the point. (Even if it were relevant I would not go to a City editor for advice on it.) A dividend is not raised because the directors think that their middle-class shareholders deserve a larger . slice of the national cake. It is raised because, having provided for the depreciation of the assets, there is enough left over to pay the equity holders an ade- quate premium—over and above the ordinary rate of interest--for leaving their capital at risk. (As I have explained there are plenty of risks involved in investing your capital in a bank when you do not control the movements of Bank rate.) What the risk premium should be will depend, of course, on the nature of the business. The more speculative, the higher. Obviously the premium will be less for investing in the bricks and mortar of a bank than for invest- ing in thz bricks and mortar of a cinema. Taking the long-term riskiess rate of interest as nearly 4 per cent. today (it is, in my opinion, much too high to induce adequate national investment), a premium of 1 per cent. might be sufficient to attract risk capital to a water undertaking but to attract it to a steel undertaking, as we saw thiS week in the Lancashire Steel issue, it is necessary to make it 3/ per cent. (71 per cent. being the potential yield on Lancashire Steel ord:nary shares at the issue price of 22s.). It is idle for Labour critics to attack a 31 per cent. risk premium as exorbitant. It is fixed by the give and take of a market. In the Lancashire Steel case the sponsors of the issue rightly judged the market to be so unsympathetic to a' steel equity that if a smaller yield were offered the capital would not be subscribed. Labour, of course, is responsible for that unpopularity because it threatens to re-nationalise steel as soon as it comes back into power.
True Rewards for Risk Capital The real point at issue then, over this question of dividends is not that of social justice but Of practical economics, of getting a society to run a mixed economy with an efficient private sector as well as a not too inefficient public sector. The private sector will not work without risk capital and that has to be attracted by the market rate. Whether a company is actually wanting to raise new capital at the moment is im- material. Its directors will always be trying to remunerate the actual capital employed at the highest possible rate commensurate with financial prudence. That rate will not be the same, of course, as the rate of divi- dend declared on the issued ordinary capital unless that capital has been brought into line with the company's real resources. For example, although the total amount of cash dividend distributed by companies last year may show an increase of 10 per cent. on the total distributed in 1952 the actual increase in dividend yield on the capital employed was nil because more capital had been employed. Marks and Spencer may have paid 50 per cent. on its equity capital in the twelve months to March, 1953, but it will be found that its net profit on the capital employed was only about 10 per cent. and even less if its fixed capital had been written up to replacement values. This is an unpleasant pill for the Socialist critic to swallow but it is worse for the worker whose mouth is always watering at the sight of the cake about to be carved. The engineers, shipbuilders and elcctricians who are demanding higher wages are natur- ally incensed when they see some employers rejecting wage claims and yet paying higher dividends. How is it possible to convince them that this is not necessarily social injustice but economic reality ?
More Information Needed The only solution for this very difficult problem is public enlightenment, for that should stir the social conscience of both employers and employees. The public needs much more information from companies about the rate of earnings on the real capital employed. Some companies already give it. ' (The Tate and Lyle directors, who have had to answer a threat of nationalisa- tion, give the profit per pound of sugar
distributed.) Other companies hide it. Who knows, for example, the real earnings per LI of capital employed by the Shell group ? The Government should compel all companies to disclose their real earnings. It could then allow different and adequate depreciation allowances for different indus- tries. It' might even.work out an equitable profits tax after allowing for a fair return on the capital employed. It might even work out a scale of risk, premiums for risk capital in different industries. Where the risk premiums are very high, where the financial overload is top-heavy, there is a case for the public sector taking over from the private sector—as there was in the home railways and as there might be for steel if these 7/ per cent. to 71 per cent. public issues were to flop. But as long as there is a private sector, risk capital must be attracted by being allowed its fair return. And labour, which has the security of a first charge on gross revenues, must not com- plain. After all its slogan in its last regime was ” fair shares."
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