Why TVNZ should still pay a dividend

NZPA reports:

The Government’s decision to take a dividend from Television New Zealand (TVNZ) “needlessly risks the livelihoods” of the state broadcaster’s workers, unions say.

TVNZ yesterday said it would have a detailed proposal of how it would cut $25 million off its budget by mid-month having last month revealed advertising revenues were 10 percent below budget, which represented an annualised shortfall of income of $30 million.

Quite clearly it is the lack of revenue that is the driver of the job losses, not any dividends. But do they have a point – should the Government not take a dividend, to save jobs?

The answer is no. First of all TVNZ is in a competitive industry. If you remove the requirement to pay dividends, it allows TVNZ to (for example) undercut TV3 in tendering for programmes, and NZ on Air funding. So you may destory more jobs elsewhere if you start playing favourites with one company.

The other reason is the opportunity cost of capital. The unions make profit sound like a dirty word, but it is simply a return on capital. And if that return is not greater than what you can get sticking the money in the bank, then you are effectively losing money on that investment. TVNZ’s return on equity in 2008 was 8.3% which is hardly huge, and I suspect it will be much reduced this year.