I have described, elsewhere, the reasons why that has happened, and its implications. What this indicates, however, is that the market capitalisation of a company's shares is not even directly related to its profits, with any given market rate of interest. Certainly, if a company's profits double, its potential to pay twice as much in dividends rises accordingly, but, whether that potential is realised is another matter. Similarly, the fact that the proportion of profits going to dividends has risen from 10% to 70% shows the opposite is also true, i.e. the profits of a company may not rise, and yet the amount it pays in dividends may do so.
Of itself, that rise in dividends, irrespective of profits, for any given market rate of interest, causes a rise in the capitalised value of the shares. If I have £1 in the bank, paying £0.10 in interest, I have no incentive to buy a £1 share providing the same £0.10 in dividends, particularly given the risk involved in share ownership. But, if the share provides £0.20 of dividends, I do have an incentive to buy the share. Money, moving from bank deposits to bid for a limited number of these existing shares, thereby, pushes up the price of those shares to £2, where the dividend of £0.20, now, again, only represents a yield of 10%.
But, as I have also described, the opposite is also true. If market rates of interest fall, in a secular trend, as they did from around 1982 onwards, the capitalised value of shares, and other assets rises. Then, any given amount of dividends means a lower yield, also, on those shares. If the market rate of interest falls from 10% to 5%, a dividend of £0.10 produces a capitalised value of the share of £2, rather than £1, even though no rise in the company's profits or dividends has occurred. The dividend yield, also, now falls to 5%. However, the shareholders, specifically those with a controlling interest, are unlike other creditors, or asset owners, or people with savings in a bank. The shareholders, because they appoint Directors of the company to look after their interests, can simply increase the level of dividends.
The Directors are themselves, usually, holders of considerable numbers of shares, and so benefit from such decisions, and they often have remuneration packages that include share options, to buy shares at a fixed price, which they can choose to exercise when the share price rises above it. Its true that, if the company profits are used to pay excessive amounts of dividends to share holders, rather than being used to accumulate additional real capital, the company itself will become uncompetitive, and, eventually, fail. However, the Directors of the company are not bothered by that, as against the situation of the actual day to day managers of the company, or even the position of the old private capitalists. Marx notes,
“It reproduces a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation. It is private production without the control of private property...
Conceptions which have some meaning on a less developed stage of capitalist production, become quite meaningless here. Success and failure both lead here to a centralisation of capital, and thus to expropriation on the most enormous scale... Since property here exists in the form of stock, its movement and transfer become purely a result of gambling on the stock exchange, where the little fish are swallowed by the sharks and the lambs by the stock-exchange wolves.”
(Capital III, Chapter 27)
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