WELLINGTON NEWS

Hokitika Guardian, 10 January 1930, Page 7

WELLINGTON NEWS

DIVIDEND REDUCED

(Special Correspondent )

WELLINGTON, Jan. 8,

There is ;i certain, significiinoev when an ordinary joint stock company reduces its dividend. A company does this when it has not earned sufficient to pay the rcgilar dividend. To ,provide against this fluctuation in pro-' gts some companies build up a reserve fund known as the “dividend fluctuation reserve,” and when thq profit of any years falls short of the amount required to pay the regular divided the deficiency is made up by drawing upon this fund. Of course tliis reserve is apart from the general reserve fund. Even in such a case when the profit with the carry-for-ward is insufficient meet the dividend it has a significance for share investors.

Banks are different to the ordinary joint-stock companies. They devote themselves to building up a huge general reserve and if the balance sheet of the banks are. examined it will be found that the reserve fund is equal or nearly equal to this reserve fund. This fund is mostly invested in gilt-edged securities, and the whole of the fund is -profit earning. It is because of the large reserve funds that the hanks are able to pay ,‘>ig dividends. Besides the general reserve the hanks have a secret reserve, and the amount of this is probably known only to the high officials. It consists of extraordinary provision for anticipated had debts which may or may not turn out to he had. and the under valuation of bank property.

A secret reserve which is no secret can ho seen in the case of the Bank of England. It does not publish any other balance sheet than the ordinary weekly statement that is cabled to all parts of the world. In that balancesheet there is no mention of landed property and yet the Bank of England building in London and its branches must he worth several millions. Banks endeavour to maintain a regular dividend. When a bonus is distributed that also is maintained if possible. When there is a. reduction in either bonus or dividend then there must be special circumstances calling for such a reduction and it can and should be viewed by the shareholders and general public as a warning that everything in the. garden is not as lovely as wo thought.

It will be remembered that the directors of the Bank of New South Wales thought it not advisable to declare the bonus of 2,1 per cent which had been paid for each of the four preceding years. There was a reduction in the year’s profit, but notwithstanding that- no doubt the bonus would have been paid had the conditions been normal, , but the conditions were not norma] as was fully explained to the shareholders at the annual meeting. Because of the adverse conditions Ipreva iling it was thought wiser and safer not to pay out the usual bonus. . . (Now we find that the Union Bank of Australia has declared an interim dividend of 121 per cent per annum while for the past ton years the dividend lias beep lo per cent- per annum. Thus the dividend is reduced by II- per cent nor the half-year, and it is obvious that reduction is- due to special circumstances apart altogether from th,e Bank. The Union Bank like the Bank of New South Wales is acting with extreme caution and commendable prudence.

Here are two strong sound banks viewing the economic conditions oi Australia and New Zealand with some anxiety, if not alarm, and have not hesitated to incur the anathemas ol investors and shareholders to maintain their undoubted strength. If such banks find it necessary to conserve their resourcess and to act with extreme caution should it not he accepted as a hint by business men and the general public to do likewise. If an ordinary business firm or individual were in a different way to take somewhat similar steps the firm or the individual would be branded as pessimists, and for the fear of being so branded the necessary prudence and caution are abandoned. Banks are in no way influenced and they are not (Particular whether their actions are viewed ns optimistic or pessimistic, their concern is to maintain financial strength and stability.

From the nature of their business bankers see further into the economic future than anyone else, and no doubt it is because they apprehend danger in the immediate future that caution extreme caution animates their every action The reduction of the dividend by the Union Bank will have a far reaching effect on the share market. Share values which have fallen during the past four or five months will go lower. Investors are becoming increasingly timid and sharebrokers a open r to''bo in for a hard time. The si uni n in the share market is not wholly due to the reduction in ,bank dividends although that Iris been a. contributing factor, the real cause of the slump is the shortage of funds for investment.

Stocks and shares will not he the onlv securities affected by the adverse conditions, mortgages, land values and other securities will be similarly affected. The hanks will and must enforce the caution that they themselves are practising. 'lt was never more needed than now and with caution must be associated that real economy that in the end will save the country

from serious financial trouble. To work hard, to get the most out of land, machinery, capital, labour and business management is our duty now. The caution shown by the bank by insisting upon their shareholders making sacrifices is a gesture that should make everyone in the community ponder over the situation seiious]y.