An article in a recent issue of the New Yorker magazine looked at the tendency of company CEOs to accumulate cash rather than hand it over to shareholders. It suggested that CEOs wanted the cash as security, to gain freedom from the scrutiny of lenders and investors, and as a ready pile with which to make bold investments.
As the article puts it, the trouble is "CEOs are more interested in empire-building than in value building." Businessmen by their very nature want to be seen to be doing something, to be busy embarking on some new venture, to be ribbon- cutting a new bakery, a juice plant or a chicken farm. Many are risk takers, as all good businessmen must be, some want to create employment. So the idea of growing the core business, controlling costs and satisfying investors may not be the top priority.
The point is relevant given that only a few weeks ago Executive Chairman of Guyana Stockfeeds Inc., Robert Badal had written a letter to Stabroek News responding to Christopher Ram's analysis of his company's 2003 performance and asserting that sometimes you have to sacrifice profits for turnover. Badal wrote of the company's "long term strategy to expand its sales ...while simultaneously diversifying to create new higher margin ventures."
GSL suspended its dividend payments this year and it has seen its profits fall from $264M in 2001 to $123M in 2002 and $78M in 2003 while at the same time making large investments.
Banks DIH has also invested heavily over the last few years only to see profitability since 1999 decline, with after tax return on equity decreasing from 13% in 1999 to 7.9% in 2003.
The cash cost of dividend pay outs rose from $165M in 2000 to $190M in 2001 and 2002 but fell to $155M in 2003 on the back of a dividend cut.
Chairman and CEO Clifford Reis in February suggested persons were involved in trying to manoeuvre the company's shares and declared that the book value according to the balance sheet was $10.31.
But after a 1 for 4 shares bonus offer, the share price slipped from $6.2 to $5.90 and now stands as of Monday at $4.40. The disparity between the share price and the net asset value is an indicator that a company is not obtaining the returns from its investment. Such under-performance would in other markets make a company vulnerable to a take over. Meanwhile investors are turning their shares in to cash on their own, with some 5.1M shares, valued at $22M, waiting to be sold. Obviously shareholders want their money one way or the other.
DDL has diversified into areas that have brought lower returns. As Mr Ram notes in his report on the company's 2003 figures, DDL's local and overseas subsidiaries accounted for 23.4% of the revenue but only 13% of the profits of the group. And while it has retained earnings for various projects, investors must be a little peeved that they are not seeing sufficient dividend yields (4.6%) to even beat the current rate of inflation (5.4%).
The conclusion is that activity that ultimately leads to lower profits for shareholders is wasted effort. Turnover may grow but ultimately you are back at square one and in the event of an economic downturn possibly more vulnerable.
For Guyana, shareholders cannot realistically expect to see their shares increase in value on the stock exchange, based on forecasted profits flowing from news of some new investment. The market is yet to acquire the liquidity and sophistication to respond to external stimuli (and in fact its movement seems to have little rhyme or reason. Witness GSI's price increasing on its dividend suspension).
So while in the main, investors are holding onto their shares for dividends, a look at the GASCI financial table (printed every week on page 8B) shows that four of the eight companies are actually yielding a dividend return below the rate of inflation. In other words the real value of their investments is declining.
As the article concludes, "if a company can't find anything fruitful to invest its cash in, it should just give it back to the shareholders so that they can put it to productive use." What a radical notion.