Dividends or capital appreciation; or both?

The share market has seen a steady decline over the last nine months or so. There are many reasons for this. Among them is the perception that the market is being manipulated and that insider dealing is rife. The Securities & Exchange Commission (SEC) is doing little to stop it; or it is not publicizing what it is doing. One thing is incontrovertible: no offender has yet been sent to jail. This is a far cry from what prevails in America, our favourite target these days for criticism. Nobody is too big in that country to escape jail sentences of up to 20 years.

Another reason for the decline in the share market is that boards still do not declare sufficient dividends. This is something I have been railing about since 1978 when I was Chairman of the Chamber of Commerce. I am constantly being assured by directors of boards that shareholders are not interested in dividends; their interest is in capital appreciation. To me this is a fallacy based on the false assumption that dividends and capital appreciation are mutually exclusive alternatives; that you can have one or the other, but not both. This is totally false because shares that yield high dividends inevitably enjoy capital appreciation. That this is manifestly true and demonstrated by John Keells, Ceylon Tobacco and Nestle’s to mention just a few. Focus- sing on capital appreciation alone has resulted in the greedy pursuit of quick and substantial profits which is the motivation for criminal offences such as insider dealing, price manipulation and the other crimes that have resulted in the decline in the reputation of our share market.

Minister Sarath Amunugama understood this and attempted to induce an increase in the level of dividends by extending the coverage of the Deemed Dividend Tax from ‘closely held’ companies to all companies some years ago. At that time the President announced in his Budget Speech that good companies declare at least 50 per cent of their distributable profits as dividends. While that was undoubtedly true of companies such as John Keells, ‘vested interests’ (an euphemism for many bad elements including the criminally inclined) managed to persuade the Government to downplay the Deemed Dividend Tax. The end re- sult of the lethargy of the SEC and the Government is that our share market is in the doldrums.

I cannot see a recovery of its old lustre unless the SEC prosecutes some big players and puts them behind bars. In the present climate of brazen criminality I cannot see this happening. It will need a new breed of very strong and upright people to reverse the present trend.

(The writer is a former Chairman of Aitken Spence)