What if companies never pay dividends?

The dividend is still a deficient culture in the history of capital development in Albania, even though we have three decades of experience with capitalism. Companies operating in the Albanian economy, in very few cases, make transparent the implemented policy as it relates to the distribution of dividends. There is still no formal economic environment for this tax that reflects the capital, but also the scholarship related to formalization and the proper financial system is missing.

Business, the state, organizations, institutes, all have been busy with policies and comments for the promotion of investments in the country, but without studying and discussing the economic and financial environment in which capital is being invested.

Academic studies or media publications about non-payment of dividends are almost non-existent. And yet it is very necessary that companies’ dividend policy should become as important a debate as their governance.

This concern is legitimate, as the fate of more than 80% of the country’s economy depends on this government, which year after year in the last two decades has replaced the multitude of former state enterprises that were the subject of a wide network of studies and analyzes from scientific institutes.

Decades ago, all state-owned enterprises paid into the budget the entire remaining part of the profit, which today is called a dividend. While private companies in today’s economy, according to tax statistics of the last 10 years, it is calculated that only 0.7 out of ten companies pay dividends. This indicator tells us that only 7% of 50,000 medium and large companies (according to Albanian segmentation standards) are following a policy that coincides with the investors’ goal: reinvestment. The rest of the businesses are implied to have reinvested the profit in their businesses aiming for expansion and growth of activity. The facts presented in the media show that the tendency of business expansion is different, but this is a matter that must be verified by the fiscal administration.

Dividend tax in budget income has always held a weight of less than 1 percent. This amount is valid with a profit distributed by the entire Albanian economy in a value that is below the threshold of 250 million euros.

If we analyze these numbers judging the reasons for the situation, in which is the transparency of the distribution of the profit after taxes, a first finding is related to the low capitalization that has accompanied the entire development of capitals in the Albanian market still unformatted according to the principles of stock exchanges.

Companies operating in Albania not only have low capitalization, but also the values ​​of the assets on which the expectation of profits is based have sharp problems of informality and evasion.

But what if companies never pay dividends?

It is not yet a disaster for the Albanian economy if a company does not pay a dividend. But the non-payment must be justified with the argument of its leaders that they have invested the profit for the rapid growth of activity (for the cases of new companies in the market), or for increasing the value of the companies (for those that have created a stability in market).

Such decisions in today’s world practice are considered valid for the good governance of successful companies (the case of companies owned by Warren Buffett, Bill Gates).

The logic of developing and growing a company that has a large reach in the market goes hand in hand with the decision to reinvest retained earnings in investments and not pay dividends.

However, the market in which these companies operate, both in terms of formality and the regulatory framework, is extremely different from the market where companies operate in Albania.

The first difference is the capital market, which is absent in Albania. This different environment is the first and last argument that differentiates the two markets where the companies operate.

If you lack the place where you must sell, then you cannot talk about shareholders, nor about the sale and purchase of shares, nor about the transparency of companies.

Of course, with the increase in the commercial turnover of Albanian companies, as well as dealings with foreign markets, the trends for capital trading in the stock market will gradually increase. NOW, that the capitals of the Albanian resident companies will need to be exchanged in the European markets and beyond, then the critical point of the creation of the stock exchange for capital trading will have arrived.

The second difference appears, if we look at the fact of non-payment of dividends in Albania starting from the influence of the tax policy. This is a discussion that does not need deep analysis. Dividend tax has not been higher than 15% in the last 10 years. Dividend taxation has not been exposed to the risk of a higher tax rate than in the country of origin of foreign investors, due to the policy of lower taxes than other countries. Meanwhile, local investors have been stimulated in diverse ways for the dividend tax over the years since most of the profit after taxes has been considered by the administration as reinvested.

But what should be the approach of Albanian businesses in this discussion?

Large and mature companies in the Albanian market, which are not reinvesting as before and have managed to have stable profits, should be oriented towards the standard of increasing the transparency of their capitals, to be prepared in the exposure we brought it to the European integrated market.

The first prudent decision is the distribution of the dividend, which formalizes and stratifies their capitals and increases the credibility of the business in the market, improving the standard of relations with foreign partners.

Based on the need to absorb foreign capital, the transparency of capital and tax payment, and especially the dividend tax, are indicators that will naturally improve the health of the economy and its opening to foreign markets. Investors will interpret the dividend payment as a signal related to the integrity of the Albanian business and as a fact of a strong management that has good expectations for future profits. The conclusion is that Albanian business seems more attractive to investors.

But if the decision of businesses not to pay dividends continues to be a recurring rule year after year, then the signals that will be given to the market and investors are the opposite of their expectations. This conclusion for the Albanian market will lead to their reluctance to invest capital in Albanian companies.

One fact remains the same over time: investors have a long love affair with the dividend.

Remember it!