Dividends are back on the agenda (see Economics column). Concerns that UK companies' penchant for distributing profits to shareholders inhibits long-term performance, have led the Government to investigate the systems of dividend payments. Dividend cover (the ratio of earnings to dividends) has been on a downward trend since the 1970s, says Schroder Economics, and reached a new low during the recession as companies maintained their payments to share-holders while earnings fell (see graph). As profits have recovered, firms have been able to re-build the ratio, but it is still historically low. The UK tax system favours distribution as, compared to retained earnings, dividends are cash in the hand for the institutions, who do not then face any additional tax penalties. In theory, corporate investment should not be affected by this as profitable opportunities should still attract capital from outside the company. When asked about factors which limit investment, the majority of firms identify uncertainty about demand and inadequate returns as the most crucial, indicating that the best thing the Government can do is to deliver a stable macroeconomic environment and keep interest rates down by reducing its own demands on the capital markets.
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