Monday, March 12, 2012

Only Dividends Matter

Your writer will take a reactionary stance here, contrary to most modern finance theory.

For the long term investor, only dividends matter for the value of a stock.

I chose that terminolgy for the reason that there is a "theorum" taught in business schools and by finance academics that dividends don't matter.  They are totally wrong.

A simple gedanken experiment proves my case.  Suppose you buy the IPO of a stock, such as GM, EK (Eastman Kodak), or AAPL and, as a long term investor, simply hold on to it ... to the bitter end.

What money do you ever receive?  The "bitter end" - the eschaton of stock investing - is either a cash buyout or bankruptcy.  All cash buyouts are pretty rare nowadays.  Can anyone name one in the past few years?  Bankruptcies are much more common:  GM, EK, etc.

Suppose the firm never pays a dividend.  If the end result is bankruptcy, the value of a long string of zeroes is ... a big zero. 

Suppose the firm pays dividends.  Then even if the end result is bankruptcy, the long term investor has received some value that he can reinvest in bonds or other stocks.

Over the long term, the bankrupcty of firms is rather common.  Management squanders cash and makes bad investments.  How we can marvel at the recurring "non-recurring" losses!

They buy back stock.  That only benefits the sellers by propping up their selling price.  Who is a seller?  For one, management is.  They use stock buybacks to prop up their pay.

Why is AAPL stock apparently undervalued?  No dividend.  They have a huge and growing hoard of cash.  The "market" obviously thinks management will squander it.  And continue to squander it.

GE bought back huge amounts of stock while the price was high.  And then proceeded to sell huge amounts when the price was low during and after the Panic of 2008.  Buy high, sell low - brilliant management.  Dopes?  No, self-serving hogs!

Long term investors should only pay for dividends.  Period.  Full stop.

45 comments:

Bud said...

huh ?????


what is the meaning of this post ???


why does anyone have to hold on to the'bitter end' ??? i don't know what 'gedanken' means...............but it should mean 'stupid'

Bud said...

one can say that because AAPL doesn't pay a dividend..............that has been one of the reasons the stock has skyrocketed

they used those monies to hire engineers and developers that invented the iphone ipad etc...........

Bud said...

Bman will you be upgrading to 'the new Ipad' ???



i think i will

Bud said...

PS


i have never looked at the dividend when making my decision to buy a stock


i buy a stock only for 1 reason..................i think it will go up................period



or as the Bman says


'QED'

Bunkerman said...

'gedanken' means 'thought' - am I suprised you don't know it ?

:)))

Bunkerman said...

AAPL would be at 1,000 if it paid a reasonable dividend.

all that money is sitting earning 0%

Bunkerman said...

The big pension funds & all index funds do hold on forever.

Bunkerman said...

you're a trader, Bud. that is different from being an investor.

Bunkerman said...

re new iPad, no, the one I have is fine. I'm not a heavy user.

Bud said...

hmmmm..............ex goldman employee op-ed today.................looks like GS may actually................uhhhhh..............



'gutting it's own beefer'

Bunkerman said...

lol, guess Bunkerman was right ... again.

Bunkerman said...

AAPL cheapskates.

Stock buyback is a zero as it just offsets dilution.

Dividend too low: should be $4.50/qtr instead of $2.65

Btw, anyone notice how Johnboy at Cisco is still wasting the company's money on acquisitions?

Spin-em said...

Bunk...my town has been a distressed city for 20 years...it just lost a court case and owes the police 20 to 30 million in arbitration,back and future pays...can a city declare backruptcy and all that be wiped away?...if it was that easy..why wouldnt they do it...I know higher interest to borrow but...wth...I told my bro you would have the answers..lool

Bunkerman said...

sorry for the delay, but yes, a city can declare bankruptcy and wipe out old debt including labor and pensions, etc.

The reason they don't do it is purely political. The politician would lose control and they don't like that. Also, the state legislature sometimes interferes. Since cities are a creatur of the State, that can complicate matters.

Harrisburg mess shows how comlex it all can become. A straight BK and reoganization is better.

Spin-em said...

Thanks Bunk...The politician would lose control....the Triple A Yankees play here...they want to sell em...give the peoples franchise rights away to pay this debt...pisses me off....would they have to selloff all city assets first or could they do it now?

Bunkerman said...

whether they can sell off assets depends on State law. In Ohio there are restrictions; PA - dunno.

It's ridiculous how the politicians smmoch the butts of sports teams - purely political.

Bread & circuses ... boob bait for the bubbas.

Spin ... lead a demonstration !!!

Power to the People !!!

maverick said...

Bman,
What do you pay for firearm insurance? My homeowner's policy covers $10k but I now have $30k in firearms. My insurance company wants $600 a year to cover $20k in firearmns. They are nuts correct? Hell, the NRA would be half that and they are usually much more expensive. Something isn't correct here.

Spin-em said...

"The needs of the many must outweigh the needs of the few...or the one"

without GOOG who said it Bunk

Bud said...

'firearm insurance'


huh???? why do u need insurance ??

that's what the Frickin firearms are!!!!!!!!!!!!!! they are your insurance !!!!!!!!!!!

don't tell me you're one of those pussies...........who's hands start shaking and sweating before u can pull the trigger


listen dude............just put a sign on your front lawn.............


'homeowner is heavily armed.........proceed with extreme caution'

Bunkerman said...

insurance thru the NRA costs $17.40 per thousand.

Bunkerman said...

Spin, easy, that was Spock in Wrath of Khan.

Bunkerman said...

I use the insurance thru the NRA.

Spin-em said...

no way in hell you didnt GOOG that Bunk.....lool

Frosty said...

QEIII QEIII QEIII

Bunkerman said...

I did not GOOG that - I've seen that movie about 10 times.

And that line always struck me - not sure I agree; seems a bit proto-fascist.

:)

Bunkerman said...

Stalin & Hitler & Mao used that concept to grind down the individual.

Bud said...

Bman what is your opinion on the StandYourGround law??

shooting in florida is getting national attention

maverick said...

Damn...never wanted to sell a gun but that damn gun insurance is worse than Porsche insurance.

Bud said...

Bman the briefing guys can't understand what is going on with TVIX.........can u help us???


ChartTrader: The most complex financial instrument ever invented is having some trouble right now
TVIX : a derivative of a derivative of a derivative of a derivative of a derivative) is getting hammered here (-7%), while neither the VIX index nor the VIX futures are negative. No idea what's going on there.

Bunkerman said...

Stand Your Ground is a good idea; doesn't seem to apply to the FL case.

Bunkerman said...

TVIX : a derivative of a derivative of a derivative of a derivative of a derivative) is getting hammered here (-7%), while neither the VIX index nor the VIX futures are negative. No idea what's going on there.

easy - the beefers are playing games. What a phony "security"!

Somewhere I wrote about those pieces of *&%$ ... where was it?

:)

Bunkerman said...

just pay the insurance thru the NRA. sheesh.

Spin-em said...

So now you insult the planet Vulcan with your proto-fascist BS????...lol

Bunkerman said...

lol ...

was that a Vulcan philosophy or that of the Federation ... uh, which seems to have been a military dictatorship :) ?

certainly not Klingon or Romulan

:)

Spin-em said...

seen the Wrath of Khan 10 times yet doesnt know about The Federation Prime Directive????hmmm...as Spock would say....interesting....lol

Bunkerman said...

uh spin ... the Prime Directive has nothing to do with freedom.

It just says don't interfere with nacent civilizations.

Bunkerman said...

oops "nascent"

Bunkerman said...

Live long and prosper ... interesting, no?

Doesn't say, Live long and be happy.

Seems to me the Vulcan philosophy is a bit ... mercantile

:)

Bunkerman said...

By the way, Vulcan is a planet around the (real) star, "40 Eridani"

:)

Bunkerman said...

so you can see, I do know a bit about the Vulcans lolol

Spin-em said...

Seems to me the Vulcan philosophy is a bit ... mercantile

LOOL


huhhhh(bunky style sigh)If I must explain to a single level mind..why associate prosper with money??? You have to think in the Multi-Dimension..as in chess..then you could understand it could be happiness,health,family,money...Spock would say...there are no absolutes...lol

Bud said...

Bman can u shoot an unarmed man legally ?? even if he is on your property or in your home .............i thought u can only use deadly force if he has a weapon

Spin-em said...

take care Bunk...you're the best bro

Bunkerman said...

huhhhh(bunky style sigh)If I must explain to a single level mind..why associate prosper with money??? You have to think in the Multi-Dimension..as in chess..then you could understand it could be happiness,health,family,money...Spock would say...there are no absolutes...lol


Hmmm ... good points. and of course Spock was speaking in English of Vulcan ideas, so may have simplified things for us mere humans.

:)

Bunkerman said...

Bman can u shoot an unarmed man legally ?? even if he is on your property or in your home .............i thought u can only use deadly force if he has a weapon

One has a much harder time claiming that one fears for one's life if the person is unarmed, but such a defense if possible: e. g. big bad guy vs. small vulnerable woman, woman can more easily cap him.

Some states permit shooting in defense of property ... such as a horse thief ... modern car thief.