the times | Tuesday May 24 2022 37

Business

Amid inflation chaos, the sensible

dividend is coming back into favour

Deliveroo made a virtue

of its ambitions, but

its shares have plunged

T

he global energy crisis is

provoking a noisy debate

about how taxation policy

can be wielded against the

witting and unwitting

winners from record oil and gas

prices.

Politicians throughout the rich

world are toying with windfall taxes

on energy companies, whose profits

are riding high on the back of

surging global demand and the

squeeze on supply for oil and natural

gas since Russia’s invasion of

Ukraine. Rishi Sunak has said that

“no options are off the table” if

North Sea oil and gas companies fail

to invest their bumper profits. Long

before the war in Ukraine, Spain’s

socialist government had responded

to rising winter electricity prices

with a one-off raid on energy

companies’ “excess profits”, which

has been extended since then. Italy

followed suit in March with a

windfall tax of up to 25 per cent on

energy companies’ profits.

The clamour for windfall taxes

reflects the desperate political need

to punish rampant profiteering at a

time when people are suffering from

the surging cost of living. Having

emerged from the pandemic with

bloated debt ratios, windfall levies

are a quick hit to generate money

that can be spent shielding the

poorest from debilitating inflation.

They also help partially to address

the iniquities of a global corporate

tax regime that for decades has

allowed giant technology companies

to game the rules in their favour.

International levies are also

coming back into fashion. The

United States is pressuring the

European Union to devise an

unprecedented international tariff

on Russian oil exports above a set

price cap. The tariff is designed to

stem the flow of cash flooding into

Moscow’s coffers, which are being

used to fund President Putin’s war.

But slapping one-off taxes on

fossil fuels should not distract

governments from the pressing need

for permanent changes in taxation

policy to help to fight energy

poverty and to penalise reliance on

hydrocarbons. The Ukraine crisis

has left Europe facing a €1.4 trillion

rise in energy costs, equivalent to

nearly 10 per cent of the bloc’s

economy, according to Goldman

Sachs. The tax response should be

more than simply profit raids.

One levy notably absent from the

present debate is a global carbon tax

to provide an incentive for the huge

shifts required to hit the global net-

zero target. Even in relatively

benign times, politicians have taken

fright at the idea of taxing carbon

use, thinking that it will

disadvantage their industry at the

expense of foreign rivals. Instead of

a tax, Britain and the European

Union use a market-based emissions

trading scheme, where big industry

buys credits to cover the cost of its

greenhouse gases. Last year,

Germany rolled out a carbon levy of

€25 a tonne on buildings and car

usage, where revenues are used to

fund subsidies for the worst-off.

Austria introduced a partial tax this

year.

Arguments against national

carbon taxes wither away if all

countries agree to impose a price.

The International Monetary Fund

has devised an international carbon

floor where the price paid

corresponds to a country’s wealth. It

would mean America, Britain and

Europe would use a minimum floor

of $75 a tonne, falling to $25 for the

poorest. This collective jump into

carbon taxation would not

disadvantage industries in richer

countries, the fund says, and would

dramatically reduce emissions.

Nations that would suffer most

from a global carbon tax are the big

fossil fuel producers and

environmental laggards such as

Russia. The IMF calculates that

Russia’s economy would be the

biggest loser, taking a hit of more

than 3 per cent of GDP under a

global carbon price floor by 2030.

The irony of war means that the

chances of agreeing sweeping

international taxation deals have

diminished in the face of rising

protectionism. It’s likely to leave the

world with more short-term cash

raids rather than smarter energy

taxes.

Mehreen Khan

“A lot about this is

very healthy,” the

chief executive of a

big City investing

institution said the

other day. He was trying to strike an

optimistic note amid the starkly more

hawkish mood music coming from

central banks.

The three decades-long era of

increasingly accommodative

monetary policy and falling interest

rates is over for now and perhaps for

decades. Triggered by a burst of

inflation, policymakers are having to

ease back on the throttle, with

implications for every asset class.

My friend and I were cheerfully

celebrating one consequence — the

recent wobble in cryptocurrency

prices. Better, surely, that this

irrational fad should deflate now than

it get puffed up into a bigger bubble

that bursts later with far greater

systemic damage and pain?

But the move towards less

abnormal monetary policy goes much

wider than this, reducing expected

returns from bonds, from equities and

perhaps even one day from property.

Nationwide Building Society officially

warned last week that house prices

could fall, not something you often

hear from a purveyor of mortgages.

In one area, the writing is already

on the wall. Dividends are back with a

vengeance. It’s not simply that they

are more plentiful than ever. The

Janus Henderson Global Dividend

Index today shows global dividends

surging by 11 per cent to a record

$302.5 billion in the first quarter of

the year. Total payouts this year by

the world’s 1,200 biggest listed

companies are set to hit $1.54 trillion,

up by an underlying 7 per cent, Janus

reckons. That is roughly equivalent to

the national output of a medium-

sized economy, such as Canada

or Australia.

Over much of the past

five years, it became

fashionable to deride

income-paying

companies as dull,

stodgy dinosaurs,

as defeatist losers

unable to find

productive capital

investment

opportunities.

Investors who still insisted on buying

them were mere “coupon-clippers”.

They were “worse than Belgian

dentists”, one scornful venture capital

chief told me (are Belgian dentists

really are as risk-averse as their

reputation?).

Superlax monetary policy stoked

this view. With yields on risk-free

government bonds at zero or even

negative, equities didn’t have to yield

much, or anything at all, to be

attractive. Investment time horizons

receded into the distance: a possible

dividend in ten years became just as

valued as a certain dividend today.

Applying a discount rate of zero

meant a profit in 2050 was just as

valuable as one today.

That led to the rise of countless

lossmaking technology-based

businesses with lofty ambitions but

no intention to pay dividends for the

foreseeable future. It is those firms

that have taken the biggest bath this

year on Wall Street, from Netflix to

PayPal to Uber to Peloton.

In Britain, which traditionally had

been rather keen on dividends, the

change of heart reached its

apotheosis last spring, when a string

of ambitious businesses succeeded in

raising capital and floating in London.

All had one thing in common: none

had any plans to pay a dividend.

Deliveroo, Wise, Trustpilot,

Made.com and Darktrace made a

virtue of their youth, their gigantic

market opportunity and their plans to

plough every spare penny back into

the business. In the year to date,

shares in Deliveroo are down 54 per

cent, those in Wise are down 51 per

cent, Trustpilot is down 66 per cent

and Made.com down 62 per cent.

Darktrace has been more resilient, off

only 5 per cent, but is still less than

half the peak it achieved last autumn.

The pendulum has swung

back from favouring

capital-hungry

businesses to more

mature enterprises

with a track

record of

producing

income,

preferably

inflation-

protected

income. On again,

the discipline is

seen as a virtue. As

Paul Meader,

chairman of Schroder

Oriental, remarked yesterday: “The

love affair with profitless growth

companies can quickly turn sour.” It

might sound smug coming from the

head of an investment trust fortunate

enough to be stuffed with stakes in

dividend-gushing chipmakers, oil

companies and miners, but he is right.

It’s all very paradoxical. Classic

income-paying stocks such as utilities

are supposed to do badly in times of

rising interest rates and inflation, but

then the whole value v growth debate

is more nuanced and complex than

we are led to believe. Real companies

don’t fall into neat categories. Apple

and Microsoft are seen as growth

stocks, but both are in the top ten of

divi-payers globally. And, crucially,

while still offering only a modest

yield, they are raising dividends each

year by more than inflation.

Even so, most of the historic

evidence, when it comes to total

returns, still points to value stocks

beating growth stocks and high-

yielders beating low-yielders, even

after the great technology love-in of

2016-21. Since 1927 in the United

States, high-yielders have produced

an average total return of 11.2 per

cent, low-yielders 9.8 per cent and

zero-yielders 9.3 per cent.

The track record in Britain is even

more pronounced, according to the

Credit Suisse/London Business

School investment returns team: in

the past 122 years, high-yielders

delivered an average of 10.4 per cent a

year and low-yielders 7.9 per cent.

The same long-term pattern holds in

most developed country share

markets.

It’s not that growth companies

don’t go on to expand their profits

faster than value stocks. They do. It’s

that investors pay too much in the

first place for that expected

outperformance. They tend to be too

optimistic about the hares and too

pessimistic about the plodders.

It’s possible that the global

slowdown could yet persuade central

banks to reverse their tightening

plans. It’s possible there is yet another

leg higher for those growth stocks. It’s

possible that dividend-payers are

pushed back into

the wilderness. But

it’s not the way

investors are betting

right now.

‘‘

’’

Patrick Hosking is Financial Editor

of The Times

Mehreen Khan is Economics Editor of

The Times

An effective carbon levy

would remove a need for

short-term windfall taxes

Patrick Hosking

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‘The chances of agreeing

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