Prime Minister Dr Rowley in his opening remarks to the Recovery team said, “…Covid-19 has unmasked the inequalities that exist in the economy and at the wider societal level…it has also demonstrated that all segments of the society are at risk.”
In this context, the lead opinion of the May 20 Express Business, authored by the magazine’s editor Anthony Wilson, incoherently devised to question the dividend decision of Republic Financial Holdings Ltd. and its impact on two specific funds, the National Investment Fund and the CLICO Investment Fund, is stunning.
The incoherence stems partially from a lack of acknowledgement that these funds are not widely held. In the former fund, there are less than 8,000 retail investors and in the latter case, the assets were originally for the benefit of former CLICO policyholders etc., less than 15,000 persons. These funds are dwarfed by those held by The Unit Trust, which has 580,000 individual clients. These relatively small groups of owners have benefitted from steep asset price appreciation and rich dividends off the back of the same Republic shares. The questioning of the Republic decision to halve the dividend, on the basis of the effect on these groups, is galling.
Risk cuts both ways. The CIF holders, whose fund terminates in 2023, own the second most liquid asset on the Stock Exchange. They could sell at any moment. The NIF business model specifically states its “hold to collect” policy which means that it depends on payment of principal and interest (the SPPI test), not dividends paid out of reserves. Is the Express Business promoting the view that ‘some animals are more equal’?
The decision by the two banks is worthy of examination and shows more than it hides. The Opinion describes as ‘unfortunate’ the lack of details about the Republic decision and its $368 million additional provision comparing that to the First Citizens’ $27 million provision, with no recognition of their impairment policy differences or portfolio quality. This affords the latter to promote their dividend decision as ‘recognising the need for a balanced approach out of consideration for our valued shareholders while ensuring organisational sustainability’. Is consideration for Corporation Sole, the major shareholder, influencing the Board to declare a dividend for short-term reasons?
In the 2008 financial crisis, global dividend income fell by 18 per cent. Therefore, we ought to discuss the dividend policy link with investment in ‘safe assets’ (not to be confused with risk-free assets), be they here or overseas, the implication for capital flight and availability of foreign exchange. Increases in stock market wealth tend to increase savings by the rich but have a weak or no correlation with consumption which requires consumer confidence.
It is proven that, in difficult situations, companies which cut their dividends to prioritise liquidity and solvency often recover faster than those who struggle to maintain their dividends. The latter can ultimately destroy shareholder value. The impact on the intrinsic value of a business from a temporary dividend cut is marginal.
Facing an enormous uncertainty about the depth of this coming recession and its duration, Corporation Sole will do well to advise the First Citizens Group to think long-term. We, as a country, could ill afford a repeat of earlier errors. On each previous occasion, the poor taxpayer paid while others escaped.