Day 12

Cap dividends!

Each year your company (hopefully) generates profit. It’s the size of your after-tax profits that impacts on the amount of dividends the company is able to pay out to the shareholders and, if the shareholders make a habit of taking all of those after-tax profits as dividends, the company’s net assets won’t grow. The balance sheet will show little or no year-on-year improvement in the company’s financial position.

Buyers prefer to see the company’s net assets growing, and this can be achieved by leaving a proportion of the after-tax profits in the company each year; so try to pay out only a proportion of the after-tax profit as dividends.

Thinking about this from a cashflow point of view, if all of the after-tax profits are taken as dividends, the shareholders are effectively plundering the company for every penny it earned. Where’s the cash for reinvestment going to come from – for capital expenditure on plant and machinery, equipment and so on?