Shareholders should not just profit from the upside, but eat the downside too, which his exactly what this is. You can't take the dividends, claiming "I took all the risks", and then expect the state to bail you out. No upside without downside. Skin in the game.
If the economy slows down and gross profit decreases, company A stops its dividend. Company B defaults and declares bankruptcy.
Do we really want to bailout only company B? Tax policy already pushes companies to look more like company B.
While that is true for a lot of large companies (kind of like the ones that shouldn’t be asking for state aid), for the small ones it’s very different.
As a small business owner myself, it matters hugely - if the company makes $100,000 in profit and I have to pay two employees $40k each, I’m barely making ends meet.
Honest question - how would paying yourself dividends change this math? Dividends have to come out of the same $100k right?
If you didn’t keep enough cash on hand (because you were shoveling profits out the door), you lose your ownership interest (insolvency with no bailout).
These are very reasonable conditions for a nation state bailout.
It's important to point out that "shareholders" could include "managed retirement plans", especially when talking about stocks that pay dividends.
This is implying you could keep enough cash on hand. Outside of tech giants, how many companies keep enough cash reserves to survive months without revenue?
Edit: Very few business have that cash on hand, but will usually have access to credit revolvers that could carry them through this. I am aware of many firms that have drawn down their entire revolver.
Now whether we should be bailing companies out, that's a separate question.
Fundamentally, if 2020Q1/Q2 GDP is effectively down 30% or whatever the number is, and we want to "replace" that loss, it's hard to see where that sort of money can come from except "all of us" in various forms (higher taxes due to government bailouts, higher prices, higher inflation, etc, etc). The main question is where the incidence of the economic pain will fall. Letting companies go out of business places that incidence partially on the shareholders and partially on the ex-employees and partially on the ex-customers. Unemployment insurance and the like can partially help the employees in the short term. The shareholders seem to get little sympathy, understandably, though note that they include things like pension funds and whatnot. Customers (who can no longer get the goods the company used to provide) may be just out of luck or other companies might at some point spring up to address the demand. In the short term they are just out of luck.
It seems to me that a lot of economic readjustment will take place no matter what, with open questions about speed and smoothness.
Simple, bail the companies out (thus saving all the jobs), but wipe out (or significantly dilute) existing shareholders.
They find themselves talking to themselves for the money.
They hate that.
I’d agree it’d be different if your business is small (less than $10M/year in turnover); you’d look at the books with a less critical eye.
When a company requires more cash, in times of need, it can issue debt or raise capital. Capital is usually paid last, in the pecking order. If government is lending to companies, it is reasonable to require them to avoid depleting its cash reserves paying capital.
Except if they did actually take all the risk, they would presumably be going bust right now...but they aren't going bust because they are being bailed out.
This is an example of "privatizing the gains and socializing the losses", the opposite of ownership risk.
Besides dividends are not the only reward of ownership, the equity/stock has a value separate from the dividend...a company taking taxpayer dollars and turning around and give x% of taxpayer bailout to owners is a direct transfer of wealth to the ownership class and just burns the cash flow the business presumably needs to attempt to survive.
This makes perfect sense, otherwise it's a textbook case of socializing the losses and privatizing the profit. Paying dividends (and stock buybacks) is a trade-off that companies make, that makes the company less resilient. Risk/reward needs to work in both ways, both in terms of gains as well as losses.
I'd disagree strongly on that account. The business owners take the monetary risk, but that is a small portion compared to the overall risk of the workers. If somebody moves across the country, that is a risk. If somebody invests time in learning a skillset, that is a risk. If somebody is going to need to choose between rent and groceries if they are laid off, that is a far bigger risk than the monetary investment of a venture capitalist.
I agree with your point - and all of these risks are completely unrecognised in our current system. They need to be.
Well first off, dividends are a normal method for business owners to make an income... they take all the risk, but reap some limited rewards by taking dividends rather than a salary.
Buying back shares I’m fine with. While that could actually be seen as a form of “reinvesting”, I get the point.
What sense does the “registered in tax havens” part make though? If they’re a foreign-registered company would they ever have been eligible for aid? Plenty of companies in Europe are employing thousands of people, but are “owned” by a company elsewhere, so how do we define that ownership and “tax haven”?