Why could a high depreciation allowance imply a payment of high dividends? For example, in a course example, it is said that:

British Energy would pay dividends out of cash flows. These were expected to be quite high, in spite of the poor predicted earnings, because British Energy had very large depreciation allowances from the construction of its highly capital-intensive nuclear power stations. British Energy had no need to reinvest these cash flows, because nuclear power generation is considered an industry in decline.

I don't really understand the relationship.

Thank you.

1 Answer 1


It's an accounting thing. The expensive nuclear power stations have their capital value depreciated over time. The usual assumption is that some of the company's income will go to replace the assets, so it's counted as an expense.

However, since they won't be building new plants, they can pay a dividend despite not making much of a paper profit. Essentially they are slowly winding down the nuclear generation part of the company and returning the asset value to shareholders as cash.

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