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.

Make Them Pay

The most ridiculous idea I've seen recently is the one floating around to give the corporations a tax holiday on their accumulated overseas earnings. Here's the main facts: A company creates an overseas subsidiary to do business in other countries. It makes money and pays taxes wherever it operates, such as in Europe or Asia. The company also takes an accounting charge to US earnings for the taxes due to the US, but the actual payment is deferred until the cash is brought back to the US. The company receives a credit on its US taxes for the foreign taxes paid on that income - thus NO double taxation.

Now they want to get out of this tax liability - one already booked and owed. The overseas countries got their taxes, but the US - the home country which provides them existence - would not. That is utterly ridiculous.

Example: Cisco Systems with its CEO, John ("JohnBoy") Chambers. He co-authored an op-ed in the WSJ yesterday asking for this tax break. His co-author was president of Oracle. Both of them make millions of $ a year, but want more.

"One trillion dollars is roughly the amount of earnings that American companies have in their foreign operations—and that they could repatriate to the United States. That money, in turn, could be invested in U.S. jobs, capital assets, research and development, and more.

"But for U.S companies such repatriation of earnings carries a significant penalty: a federal tax of up to 35%. This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world—except here."

This article and the entire argument is first class sophistry. The companies have ALREADY booked the taxes they OWE to the US. There is no "penalty" - the tax is owed.

In the first place, the only money the company cannot reinvest is the money they OWE to the US government. The rest of the money - up to 65% - can be reinvested. Second, they already OWE that money and have reported that liability to their shareholders. Third, nothing makes them actually invest that money - they can use it for executive salaries or dividends or whatever. Claiming this is a job issue is a total LIE. US interest rates are extremely low. The companies can easily finance new investment for jobs with long term bonds. They are simply lying when they say this tax break is needed.

All JohnBoy and his clique want is another free ride to get more executive pay via stock options and other massive pay packages.

Here's a better idea: tax the entire worldwide earnings NOW. Let's collect this long overdue debt. Close this overseas earnings loophole forever.

Use the money to pay down US debt.

Word of the Day

"Coxcomb" - noun [$10]
Coxcomb means an ostentatiously conceited man, a dandy.
Sentence: Corporate coxcombs seem to think the world revolves around them, that they are Dukes or Princes. It's time to bring them down to learn about the common man & woman. Make them pay.

TGIF

I make a lot of jokes about my influential readers and new readers, but today I saw stories in both the Financial Times and Wall Street Journal that seems to imply my readership is truly huge and influential. In June I wrote a blog making recommendations for all CFOs - viz, Chief FInancial Officers of major corporations. Here's the link ->

http://viewfromthebunker.blogspot.com/2010/06/attention-cfos.html

Lo and behold, in today's FT I saw this story: "US banks are taking advantage of improving earnings and growing investor demand to raise billions of dollars in debt at historically low interest rates, a move that could boost the sector’s profits in coming years."

And this story in the WSJ: "The global corporate-bond boom is gathering steam as companies rush to take advantage of some of the lowest borrowing costs in history. Companies from global giants McDonald's Corp. and Kimberly-Clark Corp. to Indonesian telecommunications company PT Indosat Tbk are rushing to sell debt. This month has been the busiest July on record for sales by U.S. companies with junk-credit ratings. Asia's debt market is on pace for a record year."

How about that ! CFOs worldwide read this blog and followed my advice, given many weeks ago. Combining this readership with Ben Bernanke, Rush Limbaugh and many others in the Ruling Class, it seems this blog rules !!!

Now if only my Ruling Class readers would listen and change their despicable behavior !

Investors

Don't buy any of those bonds being sold - they are long term certificates of confiscation. The rates are ridiculously low. Wait.

The stocks of those big companies able to sell such favorable debt for long term maturities will eventually benefit from their issuance. Mrs. B favors the big blue chip stocks that pay fair dividends and are not stagnant. Their earnings yields are excellent now and they are diversified worldwide, thus not unduly dependent on US growth.

Actions

Doing nothing. Krypto is just sleeping on the couch ... she is truly a couch potato dog.

Word of the Day

"Afflatus" - noun [$10] found in Goethe's Faust.
Afflatus means a divine, creative impulse, inspiration.
Sentence: (A) (Goethe, in Faust, Prelude in the Theatre)
"Why talk of mood, divine afflatus
That ne'er to waverers occurs ?"
(B) (Bman) Ideas for blog posts do not come from afflatus, but from much reading, hard thinking and paying attention to the world.

Reflections on Value

The situation with General Motors can provide an illuminating case study of what the value of a corporation actually is for stockholders. That corporation has existed in one form or another for 100 years. Suppose one held his shares the entire time. What did stockholder receive for the equity investment in common stock ? That only tangible value received is the dividends paid.

What did stock buybacks do for him ? Nothing. Stock buybacks subsidize the sellers of the company's stock at the expense of the long term holders.

This downturn shows that all stock buyback plans are a bit of a scam. Now, just when stocks prices are very low, the companies are cutting back on stock buybacks. And many banks are issuing new shares at very low prices after buying back stock for years at much higher prices.

Dividends benefit long term investors. Stock buybacks benefit traders, hedge funds and speculators at the expense of investors.

What should a company do with its excess cash flows in good times ? That is quite easy. Pay down all short term debt due within 10 years or less. Raise its dividend to a level payable even in poor environment After all, with less debt, more cash flow can be used to pay dividends. Also, overfund the pension fund to give it a cushion for downturns.

In good times a company should have paid down all its short and intermediate term debt and funded all long term assets with a conservative mixture of long term bonds and solid equity. Then it can survive a severe downturn and have resources to make favorable investments then at low prices.

CFOs need a refresher course in corporate finance.

Word of the Day

"Rowel" - noun and verb [$10] - a Mencken word
Rowel means (noun) a spiked revolving disc at the end of a spur; 2. (historical) a circular piece of leather, etc. with a hole in the center inserted between a horse's flesh and skin to discharge an exudate; (verb) 1. to urge with a rowel; 2. (historical) to insert a rowel in.
Quote From "The Impossible H. L. Mencken", page 591 from his Scopes Trial coverage referring to the Scopes jury: "... a trial before a jury of men who have been roweled and hammered by those opponents for years ..."
Sentence: The very highly paid "managers" of US corporations are about to be given a hammering by politicians roweled by an angry public seeking retribution, who in turn were roweled by those managers who cut the pay and benefits of the common man while paying themselves colossal sums for "good management" now seen as a lie and scam.