Should governments intervene to limit excessive dividends by private firms? A UK caste study of Asda and British Home Stores (BHS)

Listed companies have strict dividend rules. Dividends should not exceed profits and management must prove that their size depends upon underlying performance. Additionally, management can be held accountable by shareholders for dividend decisions; for example, after HSBC suspended its dividend due to the pandemic last year, shareholders threatened to sue for payment. Listed company dividends are therefore guaranteed to be sustainable and accountable. However, large private firms are exempt from this scrutiny because management and shareholders are one and the same, and are thus not held accountable by external actors. Numerous private firms, such as Asda owners Walmart and also British Home Stores (BHS), have paid very large dividends to their owners which at times risk sending the company into liquidation, raising the question of whether these dividends should be subjected to restrictions.


Dividends, however large, are justifiable when they are necessary to ensure that companies, both holding and acquired, are profitable. If a business cannot reinvest profits in a way that generates returns higher than its capital costs, it should pay out the money as dividends so the owners can reallocate the funds to derive a higher return. For example, in 1999, Asda was purchased by Walmart for 6.7 billion GBP and sold last year for 6.8 billion GBP. After inflation adjustments, the original acquisition price rises to 11.9 billion GBP in current terms, which incurs real capital losses of 5.1 billion GBP. Due to the low margin, low growth and highly competitive nature of the groceries sector, Walmart expected and realised limited capital gains. This is also evidenced by the fact that one of Asda’s competitors, Morrisons, has only produced returns of 18% over the period from 1999 to the present. Expecting limited return, or even losses, dividends were paid in order to reallocate the capital Walmart had invested into Asda. Whilst under Walmart control, Asda paid nominal dividends of 4.3 billion GBP, including special dividends of 1.3 billion GBP in 2003 and a further 1.15 billion GBP in 2020 (note that dividends can still be paid if they exceed profits). Adjusted for inflation, the real value of these dividends rises to 5.8 billion GBP which exceeds capital losses to produce a real profit of 735 million GBP. Also, because these withdrawals were likely reinvested in more profitable projects elsewhere by Walmart’s shareholders, these reallocations as dividends seem a justifiable financial decision.


However, excessive dividends should be restricted if they prove unsustainable.  An example of dividends contributing to the firm’s failure was British Home Stores (BHS). It was acquired by Philip Green in 2000, then sold for a nominal sum in 2014, going into liquidation two years later. From 2002 to 2004, BHS paid out 418 million GBP in dividends, double the total after-tax profit of 202 million GBP, which reduced its retained earnings from £216m GBP to £19m GBP.  Alongside heavy losses totalling 315 million GBP between 2009 and 2014, retained earnings fell further to -£323m GBP. As a result, net assets fell from 295 million GBP, to -256 million GBP. The payment of excessive dividends partially rendered the firm insolvent and significantly worsened its financial position.


Additionally, the fixed value of BHS’s assets fell from 430 million GBP in 2000 to 183 million GBP in 2014 because depreciation exceeded gross investment, so net investment was negative and this underinvestment can be linked to the excessive dividends. Consequently, the firm had less to invest, so the quality of its stores fell and it was less able to update its catalogue to cope with rapidly changing retail conditions. Overall, an excessive amount was paid out of BHS in dividends. If these dividends had been capped by statute, BHS’s financial position would have been healthier, its stores and catalogue would have received more funding, and perhaps it still could have been trading today.


Overall, it is arguable that excessive dividends, particularly those that exceed profits, should be capped in some way; for example, dividends should not exceed 75% of annual profits, and authorities should intervene in the cases where they do. Similar regulation is not required for listed companies because they rarely pay excessive dividends, due to the aforementioned mechanisms. If excessive dividends are partially responsible for a firm’s demise, the owners should be legally required to help bear the general costs of liquidation. This would strongly disincentive unsustainable withdrawals. As a result of this, fewer large private firms would go into administration as their financial position would be stronger.


By Jon Garner

Sector Head: Jackson Philips





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