As the global economy crumbled, and automotive sales around the world plunged during the COVID-19 pandemic, Guelph-based auto parts maker Linamar was feeling flush with cash.
So much so that at the end the third quarter, it announced it was doubling its dividend, from six cents per share, to 12 cents. That move meant Linamar would now be paying its shareholders almost $ 8 million every three months.
“It feels great to be profitable again, with earnings actually up from last year, and to see such an outstanding quarter for free cash flow despite the challenges we are facing,” Linamar CEO Linda Hasenfratz wrote in a company press release announcing third-quarter earnings of $ 125.5 million, a jump from $ 98.2 million a year earlier. Revenue, meanwhile, had fallen, to $ 1.64 billion from $ 1.74 billion a year earlier.
Boosting the dividend after seeing earnings rise at the same time sales fell would ordinarily seem like a reasonable manoeuvre. But the increased dividend comes at a time when Linamar has also been collecting a federal wage subsidy. Through the first three quarters of the year, Linamar has collected $ 108.1 million in the Canada Emergency Wage Subsidy (CEWS), while paying out a total of $ 15.7 million in dividends.
Moving taxpayer money into shareholders’ pockets is not what CEWS was meant to accomplish. But, say economists and accounting experts, that’s exactly what has happened, both with Linamar and a host of other Canadian corporations.
The program was, according to the federal government, designed to help companies pay their workers during the pandemic.
“That may be what the federal government’s goal is, but it’s not what corporations’ goals are,” said David Macdonald, senior economist of the Canadian Centre for Policy Alternatives.
To be fair, Linamar is far from alone. And its dividend yield is 0.52 per cent, fairly miserly as income stocks go (typically, Canadian bank stocks have a dividend yield somewhere between three and five per cent).
“Dividends were cut in half from an already low level during the two quarters when the highest level of CEWS was being collected; it is highly unlikely you would find a Linamar shareholder who would consider themselves enriched by the dividend,” Mark Stoddart, Linamar’s executive vice-president of sales and marketing said in an email.
Stoddart insisted that the wage subsidy helped individual Linamar workers.
“The CEWS money provided substantial assistance to Linamar in helping to cover costs during a very difficult time period and absolutely allowed us to bring more employees back to full-time work sooner than we otherwise would have been able to. It also substantially assisted employees still laid off at the time, given CEWS allowed the vast majority of them to be paid at a higher level than CERB or EI would generate,” said Stoddart.
A spokesperson for Deputy Prime Minister Chrystia Freeland said CEWS (which Torstar benefits from) has helped pay the wages of roughly four million Canadians during the pandemic, and insisted it can’t be used for dividends.
“The wage subsidy can only be claimed for employee remuneration; it cannot be used for other purposes, including dividends. The wage subsidy is designed to protect jobs and help rehire workers who have previously been laid off,” said Katherine Cuplinskas.
But while that CEWS money may not have gone directly into dividends, it made it possible for companies to pay them, Macdonald argued.
“I don’t doubt that the companies did use the CEWS money to cover payroll … However, money is fungible; if it isn’t needed in one place it can be deployed elsewhere. If companies didn’t need the money to cover payroll, because the federal government was covering it, they’ll have more money to pay investors,” said Macdonald.
Investors seemed to be pleased, whether it was the dividend bump or Linamar’s overall performance. Since mid-September, company stock has gone from just under $ 38 per share to just above $ 70.
In some European countries, similar wage subsidies to CEWS came with strings attached, such as a ban on dividends, share buybacks or executive bonuses while a company was collecting government money.
Don’t count on that happening here any time soon, said Nadine de Gannes, an assistant professor in managerial accounting at Western University’s Ivey School of Business.
“As long as there isn’t a sense of public outrage, I don’t think governments will do anything differently. There’s usually a lot more moral outrage in Europe than there is in North America or the U.K.,” said de Gannes.
Nor, for that matter, will corporations refrain from helping themselves to governmental largesse, while also paying out dividends, de Gannes said. Companies are too focused on short-term, quarterly returns and boosting their stock price, she said.
“They’ll say things like, ‘Oh, there’d be a flight of capital if we eliminated the dividend,’ ” said de Gannes.
There’s a perfectly solid business case, however, for keeping cash in the bank or reinvesting it in the business, rather than distributing it to shareholders, said de Gannes. It allows a company to focus on longer-term priorities, and gives it more flexibility, especially during a time of crisis like the COVID pandemic.
“Especially in a period of such great uncertainty, it’s not a bad thing to have more financial flexibility,” said de Gannes.
In the past, companies may well have hung onto a bit of extra cash, rather than being focused on paying investors a bigger dividend, Macdonald said.
“The idea in corporate thinking that the only thing that should matter is the return of value to shareholders has really only been around since the ’80s,” said Macdonald, noting that’s also the time when executive pay packages started getting enriched by stock options.
Suggesting companies hold back on their dividends might be anathema to current corporate thinking, but de Gannes insisted it’s not a matter of being against companies making money.
“It’s not being anti-capitalist. It’s just saying ‘let’s have a conversation about what doesn’t work any more.’ ”