MDC to pay dividend to shareholders despite accumulated losses

This week’s announcement that the Canadian listed marketing services group MDC Partners is planning to pay dividends to its shareholders came as something of a surprise. Isn’t this the company that has run up losses of $US113 million over the years? And in the last decade has it not always relied more on loans provided by its banks than on capital invested by its shareholders?

Admittedly, the company has been transformed since it began to acquire a controlling interest in the well regarded US creative agency Crispin Porter & Bogusky in 2001. It has ditched its loss-making activities in securities printing and technology, focussing entirely on marketing and communications services. It has also reduced its net borrowings from $302 million to $113 million and that’s no small feat.

But profits have been elusive. Since 2001, the group has added losses of $67 million to the $46 million of losses already accumulated at that date. So how can MDC be contemplating paying dividends?Perhaps its banks are more happy for a dividend to be paid now that their investment in the business has fallen to roughly the same amount as remains invested by shareholders.

But in good old-fashioned Britain there’s a law that says dividends cannot normally be paid to shareholders until there are cumulative profits available from which to do so. Nevertheless a company saddled with past losses may apply to the courts for permission to write off all those accumulated losses against the share capital, thereby reducing the permanent capital foundation of the business. The courts will decide whether such a step might be prejudicial to ordinary creditors and, if not, a so-called capital reduction is authorised and thereafter future profits may be paid out in dividends if desired.

No such restriction seems to apply in Canada. Yet the notion that dividends can be paid out of current profits without making good past losses seems imprudent to say the least.

“We are dedicated to rewarding all shareholders for their loyalty and commitment” commented chairman and chief executive Miles Nadal. That’s a very noble objective, but using capital provided by those shareholders in the past to pay dividends in the future seems a particularity strange way of doing so.

© Fintellect Ltd

  • Hugh Salmon

    And now they tell me this is not my 100th post after all! After all that effort….