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Higher dividends won’t boost economy, report says


While it’s true corporate cash is at an all-time high, paying it out to investors in the form of higher dividends may not do much to boost the economy, according to a report.

Most shareholders are reinvesting their dividends to boost their retirement nest eggs rather than using the money to buy things, Stéfane Marion, chief economist of the National Bank of Canada, wrote in a recent commentary for clients.

Marion was referring to a recent comment by Bank of Canada Governor Mark Carney that cash-rich companies who are unwilling to boost their investment in machinery and equipment should instead pay out higher dividends and let investors spend the money.

“Bank of Canada Governor Mark Carney is sending a message to corporate Canada: rekindle those risk-taking animal spirits or send the horde of cash sitting on the balance sheet back to investors,” Marion noted.

Carney made his remarks after speaking to a Canadian Auto Workers convention last week where union president Ken Lewenza accused companies of sitting on $ 526 million in cash instead of investing in workers and jobs.

The data came out of a Canadian Labour Congress study, called “What Did Corporate Tax Cuts Deliver.”

The study proves companies have done little to boost Canada’s economy despite a series of corporate tax cuts, said CLC president Ken Georgetti.

Carney’s remarks at the labour convention were consistent with a message he’s been delivering for some time: That it’s up to the private sector to juice Canada’s economic recovery now that households and governments are tapped out.

Still, his tone took many by surprise.

“He’s been chiding business for quite some time about the use of their financial assets. I’m surprised he was so blunt,” Georgetti said. “But that’s our governor. That’s why unions invite him to their meetings.”

It’s true corporate liquid assets as a percentage of total assets are at a record 14 per cent in Canada, National Bank’s Marion wrote.

But paying more out to shareholders may not produce the sort of economic boost Carney had hoped, he wrote.

Mutual fund data show the percentage of dividend payments reinvested in corporate shares has swelled to 85 per cent from around 60 per cent in the mid-1980s and the early 1990s in the same funds, Marion noted.

Taxation of dividends, risk aversion and the fact that financial assets are increasingly earmarked for retirement explains this phenomenon, he wrote.

“At the end of the day, the firepower of higher dividend payments on the real economy may not be all that large,” Marion wrote. “Animal spirit, be that of corporations or investors is being tamed by both cyclical uncertainty and strong structural undercurrents.”

Meanwhile, another economist took issue with the statement that Canadian companies are spending too little on machinery, plants and equipment.

Spending on non-residential structures and equipment was up 6.3 per cent in the first quarter of 2012 compared to a year earlier, Sal Guatieri, senior economist at BMO Capital Markets, wrote in a recent note to clients.

“In fact, we estimate that real spending on nonresidential structures and equipment has now fully regained its recession losses,” Guatieri wrote.

“True, it took four years to accomplish this feat, but that’s two to three years earlier than in the past two recoveries,” Guatieri also noted. “And, given the arguably more perilous economic outlook this time around, that’s a pretty commendable feat.”

But it’s unlikely Canadian business will do a lot more until the economic uncertainty in the U.S. and Europe clears, said Laurence Booth, a professor at the University of Toronto’s Rotman School of Management.

“At the moment, there’s no great reason to go out and build a factory,” Booth said.

Canadian business leaders have defended their record of investment.

thestar.com – Business