Cash balances now sit at R3-trillion in SA. Why is that? Does corporate SA hoard cash because there are no investment opportunities?
Earnings of a company comprise equity and have a high holding cost.
If there are no investment opportunities, why not pay higher dividends?
In a ceteris paribus regulatory environment, corporates will retain just sufficient cash for their working capital and short-term investment requirements. Long-term investment capital will be raised when the requirement arises.
The balance of earnings will be paid out as dividends, which can then be consumed or invested by the shareholder as he or she sees fit.
But we tax companies at 28% of earnings and a further 20% on dividends paid. The incentive to hoard cash for unknown long-term investment requirements lies in the desire to avoid the dividend tax, despite the higher holding cost of equity capital.
A further regulatory perversity lies in the unlimited ability of corporates to invest outside SA, as compared to individuals, who face severe restrictions. Continuous relaxation of the regulatory framework over the past two decades has enabled South African companies to increasingly divest capital abroad.
According to the Reserve Bank data, direct investment flows out of SA, primarily into developed markets, have totalled a massive R295bn over the past five years.
A significant majority of these investments ended in tears: Old Mutual, Anglo American, Discovery, Standard Bank, FirstRand, Woolworths and Mediclinic are among the casualties.
In contrast, the companies that kept a local focus, such as Nedbank, PSG and Sanlam, have performed much better.
The leakage of South African investment capital, and the negative wealth effect from the losses, has certainly taken its toll on the South African economy.
Dr Rabelani Dagada GrandPoint Capital
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