The National Australia Bank [ASX: NAB] takes the razor to its dividend. Actually, it’s just lopped a bit off the top. Our guess is that it’s a political dividend cut rather than a financial dividend cut.
In other words, it wanted to show the market that it is serious about maintaining its capital strength, while simultaneously not scaring off investors by reducing the yield by too much.
But here’s the rub. Even if the NAB pays out a total annual dividend of say, $1.70, the stock would still be yielding more than 10% based on today’s share price. That’s a 10%+ yield and the possibility of capital growth, versus about 5% with no growth in a savings account.
So, what – if anything – does it tell you?
It tells you a few things. One, it tells you that financial stocks have risk attached to them. And we don’t mean good risk, we mean bad risk. Two, it tells you that bank stocks are being priced for a further cut in dividends.
And three, it may also be telling you that banks are no longer being priced for growth.
We’ve mentioned several times recently that growth isn’t the be-all and end-all of the economy. That sometimes economies and companies – and indeed, individuals – need to have a period of non-growth. So, if there is going to be a period of no or low growth in the banking sector, investors will need some encouragement to buy the shares.
A whacking big dividend is one way of attracting that investment.
It’s certainly a big temptation. Especially if you rely on dividends as an income stream. However, as we mentioned yesterday, there is still too much uncertainty surrounding the banks and their profitability for them to be considered the reliable investments that they were a few years ago.
Why This Isn’t Real Privatisation
Your editor wrote some notes for The Daily Reckoning e-letter yesterday while that service’s regular editor Dan Denning was flying somewhere across the Tasman. Part of what we wrote was “That is, government is notoriously bad at doing things.”
This brought a swift response from DR reader Jim who wrote:
“Before the privatisation years, most people were happy enough with state controlled public transport, state controlled schools, armed services and police, the post offices and Telstra. Public hospitals also.
All reasonably efficient and reliable.
Today I had to abandon a train trip in the city because the now private rail operator is cutting back on maintenance and over ten minutes – two train services were cancelled. It happens every day in Melbourne, but before privatization – it almost never happened.”
Jim makes quite an interesting point. And it is probably a feeling that people have all over Australia, and indeed in other nations where former public services are ‘privatised.’
However, there’s a reason I’ve put ‘privatised’ in inverted commas. The reason is that these former public services haven’t really been privatized at all. They are not private companies operating in a free market unburdened by government regulation.
It is the same whether you look at health, telecommunications or transport.
The reality is the services that have been ‘privatised’ are actually just government services which have been outsourced to private companies, or they have been sold off but have to endure heavy government regulation.
To look at the public transport system and draw the conclusion that the trains always used to run on time, but now they are rubbish only gives half of the picture. One reason why services may have been better in the past is because government subsidized the service through taxation and it had full control over the fares being charged.
Contrast that with the rail operators who are not able to charge fares based on market rates. Instead, prices are set by the government and the rail operator receives a royalty payment. Where is the incentive for the rail operator to improve or even maintain the service if they are not able to price the service.
It is only natural that if you know your ability to increase profitability is limited then you will not try to. And therefore you will simply attempt to maintain a service, or even reduce the service. It is the same for individuals, if there is no incentive for you to work harder than your colleagues then you won’t. Plain and simple.
It has meant that private industry is restricted from pricing a product and/or service at a competitive level that is acceptable to the buying public. And that the excessive restrictions make it unattractive for new businesses to enter the market.
Therefore, the answer to failed ‘privatisations’ is not that the private sector has failed, it is that government has placed too many restrictions on the private sector.
Other Stuff on the Markets
Another slightly positive session for Wall Street. This time JPMorgan told everyone that it too was doing very nicely.
However, the Dow Jones Industrial Average only gained by 3.91 points. Not quite the same impact as the Citi Group announcement the day before. Surely the market hasn’t become that cynical that quickly.
A flat start to today’s market. All eyes are on the unemployment numbers. Forecasts predict a rise to 5%. Standby for more “job saving” and “job creating” brainwaves from policy makers.