The UK has some great shares for passive income investors to consider buying. But distributing cash to investors isn’t always the right thing for a company to do.
Sometimes, a business can use its cash in a way that significantly improves its long-term outlook. And in that situation, it’s best for investors if it doesn’t pay it out as a dividend.
Forterra
One example is Forterra (LSE:FORT), which I used to hold. The stock has a dividend yield of 1.66%, but I don’t think it should be sending cash out to shareholders at the moment.
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The company’s a brick manufacturer and – understandably – has been finding a weak housing market’s bad for business. And this has been showing up on the firm’s balance sheet.
At the end of 2022, net debt was £24m, but this jumped to £117m at the start of 2023 and reached £123m by the end of June. And that’s a lot for a business like Forterra.
For context, the company’s operating income in 2022 – its best year in the last decade – was £72m. So I think it will be a while until the firm’s able to get its balance sheet to 2022 levels.
Given this, I’d rather see Forterra reducing its debt than sending out cash to shareholders. The dividend has been cut substantially, but I’d prefer to have seen it suspended entirely.
The company’s in a cyclical downturn and things are likely to improve by themselves. But paying dividends with debt levels growing substantially isn’t something I like the look of.
Dowlais
Unlike Forterra, I still own shares in Dowlais (LSE:DWL). And despite a pretty attractive dividend yield of almost 8%, I think the company has better uses for its cash.
The FTSE 250 manufacturer also has a lot of debt on its balance sheet. But it’s planning to sell off one of its divisions, so the cash from that could be used to strengthen the financial position.
Right now though, I think Dowlais shares are incredibly cheap. And that means I’d rather the firm used its excess cash for share buybacks, rather than dividends.
If the share price stays where it is (or anywhere near it) I’m expecting to reinvest the next dividend I receive. At today’s prices, I’d like to own more of the company.
But it’s more efficient for this to happen by Dowlais buying out other shareholders. And in fairness, the company has been doing this over the last few weeks and months.
From my perspective, buybacks make a lot more sense for investors with the stock at its current levels. So I’d rather see the cash go there.
Long-term investing
Sometimes, the best thing for a company to do with its cash is return it to shareholders as dividends. But this isn’t always the case.
When a business has a better opportunity, I want to see management taking it. Ultimately, that’s what is going to determine the success of my investment.
In the right circumstances, I’m very happy to do without dividends in the short term if it means I’ll get more in the future. That is – after all – what investing is all about.
