What's with dividend fetishes?

[darkxshade]

You can try using question marks? So what is the question?

edit: Oh I did find one on the last reply... yes... yes I am serious... Arcadio serious

 

[Juked07]

You can try using question marks? So what is the question?

Oh I did find one on the last reply... yes... yes I am serious

Are you trolling?

"In what way is paying a dividend superior to other methods of putting cash in the hands of investors?"

I don't expect this is an interesting question to most people, but whatever.

Edit: In any case, I'm a bit bored of the discussion, and it was way more effort than I expected to get any answers that were relevant to the issue I was thinking about. It's not a particularly interesting issue in any case. One more thought.. This is a purely academic pondering for me - it really has no impact on my life, and I don't have any opinion about the people that posted here. If I shot down a post, it was personal in no way. I was interested purely in the concepts conveyed, so please take no offense if I came off as disrespectful.

 

[darkxshade]

Are you trolling?

"In what way is paying a dividend superior to other methods of putting cash in the hands of investors?"

I don't expect this is an interesting question to most people, but whatever.

The only other methods you mentioned were stock buybacks and expansion/reinvestment. Both of which many people have provided good reasons why they were not superior to dividends but apparently that's not the question. /shrug

 

[Juked07]

The only other methods you mentioned were stock buybacks and expansion/reinvestment. Both of which many people have provided good reasons why they were not superior to dividends but apparently that's not the question. /shrug

Huh? Expansion/reinvestment is not a method for putting cash in investors' hands. I was not interested in this comparison, as stated directly on multiple occasions. Yet posters seemed interested in primarily addressing this question. Perhaps it is an interesting question worth addressing, but I never asked it.. and I have no confusions about it so I'm not sure why I would ever ask.

Man I feel like a broken record.. All I was comparing was dividends vs buybacks. And you're right that there were some relevant comments mixed in amongst the irrelevant ones. And if you care enough to read my replies (it's certainly no crime if you don't), you'll see that I acknowledged at least one of them, and my opinion has started to change as a result.

That alone makes this thread worth it for me, despite the unanticipated effort it would take to get answers that are relevant.

 

[darkxshade]

Now I have to ask, what is the comparison then? You said DVDs vs other methods of putting cash in the hands of investors... from the OP you gave 3 methods of which one is DVDs, the other 2 I quoted you above(expansion/reinvestment or number 1 in your OP and buybacks or number 3 in your OP) but that's[number 1] apparently not a method of putting cash in investors hands? So what is?

Considering I really honestly have no clue how you want the issue addressed, I can only answer you with the notion that thousands of companies and millions of investors can't be wrong or you would have more companies doing buybacks [or what have you] than to issue dividends. But that's not the case. So there is inherently something about dividends that's superior to whatever it is you're thinking.

 

[Juked07]

Now I have to ask, what is the comparison then? You said DVDs vs other methods of putting cash in the hands of investors... from the OP you gave 3 methods of which one is DVDs, the other 2 I quoted you above(expansion/reinvestment or number 1 in your OP and buybacks or number 3 in your OP) but that's[number 1] apparently not a method of putting cash in investors hands? So what is?

Considering I really honestly have no clue how you want the issue addressed, I can only answer you with the notion that thousands of companies and millions of investors can't be wrong or you would have more companies doing buybacks [or what have you] than to issue dividends. But that's not the case. So there is inherently something about dividends that's superior to whatever it is you're thinking.

Buybacks and dividends. If there are other ways I don't know them. Probably some bizarre corporate actions exist that are less common than these two.

Of course dividends can continue to exist without being optimal. Plenty of suboptimal things exist. One possible reason is optimal choices change with changing conditions, but the system is slow to change. I still have an appendix, for instance. One possible explanation (I have no opinion as to whether this is correct) is that dividends were a meaningful and necessary signal of financial profitability in a time when reporting and regulations were not as complete and visible as they are today. But now we get to see the balance sheet of public companies every quarter, so we know if they're healthy or not without the payment of dividends. In this way, dividends could simply be an unnecessary (and potentially suboptimal) vestige of a different financial environment. I can tell other stories that could perpetuate the existence of suboptimal dividend payment tendencies, but just one counterexample disproves general claims like the one you made.

Anyway, we're beating a dead horse. We've already discovered reasons buybacks might be shitty. Are you unsatisfied with those hypotheses? Care to suggest more? Or maybe point the discussion in a direction that won't cause me to simply restate something I've already posted?

 

[IHateMyJob2004]

So what exactly is the question? Since you seem to have brushed off all of the posts that made sense that that's not what you asked?

Juked07
Location: New York City, NY
/thread

... probably works for a hedge fund or something making 6 figures. Makes me want to go to NYC and punch random suits in the face while screaming the words IDIOT, IDIOT as I do it.

 

[Juked07]

Juked07
Location: New York City, NY
/thread

... probably works for a hedge fund or something making 6 figures. Makes me want to go to NYC and punch random suits in the face while screaming the words IDIOT, IDIOT as I do it.

Relevance not found once again =(

But since you brought it up I'll hop on this opportunity to rant a bit more.. I kind of hate hedge funds. And banks. Hedge funds I mostly hate because their compensation structure (the typical 2 and 20, and variations thereof) promotes too much willingness to take on risk. I think it's garbage that so many funds execute strategies that take on a lot of tail risk or are essentially just leveraged versions of boring investment strategies and get paid for it. You probably don't need any help finding reasons to hate banks so I'll leave that to the masses.

Edit: not that it should matter, but for the curious (as if they exist...) I don't work at a hedge fund or wear a suit to work. I appreciate and enjoy the fact that I can wear shorts and a t-shirt to work.

I do find this ranting to be therapeutic in some way. Sorry guys that it takes up a row in ATOT. I just can't help myself.

 

[darkxshade]

I think dullard gave many great examples buybacks aren't ideal.

And maybe buybacks are better in theory but not good in practice.More people invest with emotions than with actual fundamentals. In the cases I've seen, most buybacks does nothing but run up the share price when the news hit and eventually settle back down regardless of whether or not it's better for investors. What people want is the money in their hands to make the decision, not for the company to make it for them. A steady stream of income in the form of dividends annually is like a drug, it promotes more investments in the company in the long term than a one time stock buyback does. Dividends are given out in doses, buybacks is a desperate cry for attention.

 

[IHateMyJob2004]

Juked,

Are you just trying to learn? Because people have given the answer more than once.

I'm actually starting to ponder if this is a troll thread.

 

[Juked07]

Juked,

Are you just trying to learn? Because people have given the answer more than once.

I'm actually starting to ponder if this is a troll thread.

Amongst all the comments, most of which don't address the question, I wonder which you think is "the" answer.

And if "the" answer is the one I currently think is a good one - buybacks entail shitty executions - I have plenty of ideas which could alleviate this problem. Regulations can be changed you know. If companies were allowed to just participate in closing prints over a period of a few weeks or months they wouldn't get reamed so hard on the prices they have to pay for stock. Granted, having a dude remember to put in an order to buy stock could be hard. Shrug.

The main other reason I see above against buybacks is that the shares repurchased tend to be poorly distributed. This is not an inherent problem with shares. Companies can just as easily misdistribute cash as they can any other asset. What's the difference?

 

[darkxshade]

Companies want people to buy their stock correct, do we agree with this? Stock buybacks promote selling of company stock, dividends promote buying. One entices holders to sell, the other entices to hold/buy. It's easier to divy up profits across all shareholders and to keep share price stable than it is to give a minority a reason to sell/unwind while the majority hold at a higher and more volatile price.

 

[SSSnail]

My company total outstanding share is 2, I held on to one, the other is float. If I buy back that share, I now own two shares. WTF is the point? Who's investing then?

If I pay dividends to that one share, at least someone is making money while remains soundly invested in my company.

Now go outside and play.

 

[Dr. Zaus]

OP works at an options desk and thinks economics is how people should behave!

Wow... Epic behavioral finance training fail. Open a Strat book and look up "path dependency"

buybacks entail shitty executions

No: the perception of buybacks is tainted in the minds of some that buy div paying stocks so a stock that pays div does so because it alwase has and that it alwase has is the reason people purchased the stock. This means that if the company changes it will upset share holders thus losing value for the owners.

Path dependency.

BTW every assumption of the economic model is dead wrong.

 

[GotIssues]

In a purely academic sense, dividends aren't all that wonderful (due to the double taxation - but that's another story), and a stock buyback is superior. The problem is, it doesn't work this way in practice.

As per your OP, you were saying that excess cash can be 1) reinvested 2) dividends or 3) stock buyback.

1) Reinvesting in the company. Once you hit a certain point, you will not grow faster than the market. It's simple math. Your next option is M&A's, which, if you don't really have a good history, you might think is a good idea. It's generally not. If a company you own is going on an M&A streak, you'd be best served to gtfo of the stock ASAP.
2) Dividends. Bird in the hand. Cash is no longer available to the company, but all shareholders get a bit of cash they can use for whatever - reinvestment, new car, whatever.
3) Stock buy back. This can be a good thing, can be a bad thing. It's not uncommon for buybacks are initiated when companies are hitting high prices (read: they are overpriced) and for all the wrong reasons. When the market catches up, the company basically just spent $50 for a $30 stock. This has been detailed by more than one person in this thread. Academics assume a perfectly rational market. Unfortunately, the market isn't rational in the short-run, and companies are run by people. This isn't to say that buybacks are bad, it's just to say it's a lot more risky without having ANY say in what happens to your money (you can reinvest your dividend, you can't get your buyback in cash without it being entirely beholden to the market).

Companies aren't necessarily going to do better with the money than what you can do with it. Once the money isn't needed for growth (not M&A's), dividend or buybacks should be considered, both have advantages, both have disadvantages.

Juked, you came in with your conclusion in hand and not really wanting any answers or discussion. I'm perplexed by your refusal to even think twice about your already formed conclusion when so many rational (and true) arguments have already been presented to you. What you need to realize is that yes, in academics, the buyback option makes more sense, but there is a reason why academics aren't bazillionaires - it doesn't work quite as neatly in practice. Dividend in hand is a sure thing, stock buybacks are a pretty big crapshoot that requires a lot of faith in the management and the market. See: Ingersoll Rand buyback (Buyback announced at $52. 2-3 months later it was at $28).

On a side note, people have been using Apple as an example of companies flush with cash that needs to get rid of it. Apple can't do that (well, it's not smart to at this point in time) because most of Apple's cash is not in America and would need to be repatriated, which is a really expensive thing to do. A lot of companies have this problem right now, actually.

 

[lothar]

I can't understand why people like dividend paying stocks. I think it's never optimal for the company/shareholders to have dividends paid.

You seem to think that I think companies should reinvest instead of paying dividends in general. I do not have this opinion at all, and I intended this thread to be about that discussion in no way. I only thought that buying stock was a better day of redistributing excess cash than paying dividends. I have since considered a few possible reasons buybacks may not be the best choice. My leading hypothesis is in my response to manly.

Several people responded to this thread as if the only choices to consider were pay dividends or reinvest. If you read the OP you'll see I don't really care about the decision between these options. I was only griping about the mechanism for redistributing excess cash.

I'd rather have dividend than stock buybacks, thank you very much.
I would rather receive a dividend if management doesn't know what to do with the extra money than for a company to destroy value to shareholders by engaging in an AOL/Time Warner style acquisition.

Example of stupid stock buybacks: Eddie Lambert spending billions to buyback shares of SHLD at $125-135+ years ago. Cisco spending billions to buyback shares decades ago during the tech bubble.

The following is typical for stock buyback, especially at tech companies.
a.) Management waters the stock, just like in the 1920's by granting huge stock options to themselves.
b.) Then, they have to do a buy-back to keep the EPS from sinking. The net result is a transfer of what should have been dividends to the common shareholders into the pockets of management at capital gains rates.
How in the world does that create any value for the shareholders?

Between June 2002 and June 2005, Microsoft(MSFT) cheered itself for spending $18 billion to buy back 674 million shares. But at the end of the three years, there were just as many shares outstanding as the beginning. Why? Because the company issued 666 million new shares during the same period. In other words, it was repurchasing shares with one hand and doling them out with the other.

Example of stupid acquisitions: AOL/Time Warner. Mobil buying Montgomery Wards. Microsoft almost way overpaying for Yahoo, the only thing dumber was Yahoo turning them down. Daimler buying Chrysler for $30 billion in 1999 and selling it for $9 billion.

 

[JEDI]

So call me an idiot then. It's tax time and all my 1099-DIVs are coming in along with price gains on held shares. I'm pretty damn happy and have no intention of selling. I intend to live off these and I'll take the cash in hand at low LTCG rate.

This is me giving you the perspective of an owner, think about my perspective than your academic one. If paying a dividend was a bad move for the company, they wouldn't do it.

doesnt the 15% DIV rate expire this year (2012)?

and do you have to hold for 1yr for dividends to be 15%? or all dividends 15%?

if the latter, then large cap value funds seem even more attractive @3% yield.
better than what's paying in the bank.


edit
hm.. large cap value funds have a higher yield than Dividend sector funds?
Vanguard Dividend Appreciation ETF (VIG) only pays 2.3%. https://personal.vanguard.com/us/funds/snapshot?FundId=0920&FundIntExt=INT

 

[LurkerPrime]

Sigh, this is so wrong =(

Buying a stock for the dividend is NOT a positive expected value strategy. The market equilibrium share price is a function of the perceived value of the company, including all cash and assets. The perceived value of a company after they hand out cash is less by the amount of cash they now do not have. Therefore the stock trades lower on the ex date. It is not because the masses have collected a dividend and are now selling out. You're just paying fees if you try to execute this "strategy."

A company's share price does not approach zero if they are profitable because they GENERATE PROFITS. They then pay PART of the profit out as dividend, and therefore their share price is able to continue growing.

It's nice that you've heard of words like revenue, profits, EPS, and PE, but your demonstrated lack of overall understanding and misinformation is surely a disservice to the audience. Please don't do that..

I never said this is a practice I perform, but it does happen. Stock volumes are usually higher days prior and after the ex-div dates. Anyway out of curiosity how much money do you have invested in the market? What are you invested in? How are those investements doing? Just asking to make sure you're putting your money where your mouth is, and not just trolling us.

Ah you work at an options desk. This explains ALOT. Most dividend paying stocks have a low beta. This makes option prices kinda shitty, and the chance that you'll end up "in the money" relatively low. On top of that you have to worry about the stock price fluctuation around the ex-div time. I'de shun dividend paying stock too if I was in the business of options trading. Growth stocks are where its at for making money(or losing your ass) in options.

 

[LurkerPrime]

doesnt the 15% DIV rate expire this year (2012)?

and do you have to hold for 1yr for dividends to be 15%? or all dividends 15%?

if the latter, then large cap value funds seem even more attractive @3% yield.
better than what's paying in the bank.


edit
hm.. large cap value funds have a higher yield than Dividend sector funds?
Vanguard Dividend Appreciation ETF (VIG) only pays 2.3%. https://personal.vanguard.com/us/funds/snapshot?FundId=0920&FundIntExt=INT

IRS publication 550. The section on dividends will answer your question. In short though if I remember correctly (and if it doesn't change this year) its 60 days prior to the ex-div date and 60 days after the ex-div date that you need to own the stock in order to get the longer term cap gains rate of currently 15% (can be lower rate if your tax bracket is less than 25%). Again all subject to change this year if congress decides to change shit.

 

[EagleKeeper]

I have stocks that I obtained that had a martket price of about $10/share 10 years ago.
Now they are worth $7.50
Yet I get a 6-8% dividend quartley that I reinvest.

The value of the stock has gone down; yet the overall value of my investment has gone up.

Can you identify stocks that have generate a steady increase of share price 7% per year.

 

[JEDI]

I have stocks that I obtained that had a martket price of about $10/share 10 years ago.
Now they are worth $7.50
Yet I get a 6-8% dividend quartley that I reinvest.

The value of the stock has gone down; yet the overall value of my investment has gone up.

Can you identify stocks that have generate a steady increase of share price 7% per year.

the dividends are built into the stock price.

everytime they release a dividend, the stock price drops by that amount. then you add other market factors to get to the final stock price of the day.

 

[Juked07]

I'd rather have dividend than stock buybacks, thank you very much.
I would rather receive a dividend if management doesn't know what to do with the extra money than for a company to destroy value to shareholders by engaging in an AOL/Time Warner style acquisition.

Example of stupid stock buybacks: Eddie Lambert spending billions to buyback shares of SHLD at $125-135+ years ago. Cisco spending billions to buyback shares decades ago during the tech bubble.

The following is typical for stock buyback, especially at tech companies.
a.) Management waters the stock, just like in the 1920's by granting huge stock options to themselves.
b.) Then, they have to do a buy-back to keep the EPS from sinking. The net result is a transfer of what should have been dividends to the common shareholders into the pockets of management at capital gains rates.
How in the world does that create any value for the shareholders?

Between June 2002 and June 2005, Microsoft(MSFT) cheered itself for spending $18 billion to buy back 674 million shares. But at the end of the three years, there were just as many shares outstanding as the beginning. Why? Because the company issued 666 million new shares during the same period. In other words, it was repurchasing shares with one hand and doling them out with the other.

Example of stupid acquisitions: AOL/Time Warner. Mobil buying Montgomery Wards. Microsoft almost way overpaying for Yahoo, the only thing dumber was Yahoo turning them down. Daimler buying Chrysler for $30 billion in 1999 and selling it for $9 billion.

Cool, you're agreeing with sentiments posted above by both others and myself. Buybacks are often executed in shitty and undesireable ways. This results in the company buying back fewer shares for the same $ that another market participant might (liquidity providers fade, other market participants go the same way, etc). It's nice that you have specific examples of this happening. But buybacks don't NEED to be executed poorly. You could envision a system where regulations were different, and firms could buy back this or that brokerage firm to put in the order on some sort of clever vwap algo over a longer period of time, and companies wouldn't lose to market impact.

As for problems with issuing shares.. From a value perspective it doesn't really matter how many shares are outstanding, as long as it is well executed. If you can issue shares at the current fair market price, existing shareholders are not hurt in any way, the company is simply now more capitalized.

As for acquisitions, it might be interesting to get a debate going on whether acquisitions are a good idea, what circumstances might be relevant to the decision, etc. I have no interest in it though, as indicated by my posts above, so it'll have to be between some other people.

 

[Juked07]

the dividends are built into the stock price.

everytime they release a dividend, the stock price drops by that amount. then you add other market factors to get to the final stock price of the day.

This is correct.

And if this company that was paying divs had bought shares (with reasonably good execution) with those dividends instead of you buying shares, your investment would be worth just as much (and perhaps more due to tax deferral reasons).

 

[Juked07]

In a purely academic sense, dividends aren't all that wonderful (due to the double taxation - but that's another story), and a stock buyback is superior. The problem is, it doesn't work this way in practice.

As per your OP, you were saying that excess cash can be 1) reinvested 2) dividends or 3) stock buyback.

1) Reinvesting in the company. Once you hit a certain point, you will not grow faster than the market. It's simple math. Your next option is M&A's, which, if you don't really have a good history, you might think is a good idea. It's generally not. If a company you own is going on an M&A streak, you'd be best served to gtfo of the stock ASAP.
2) Dividends. Bird in the hand. Cash is no longer available to the company, but all shareholders get a bit of cash they can use for whatever - reinvestment, new car, whatever.
3) Stock buy back. This can be a good thing, can be a bad thing. It's not uncommon for buybacks are initiated when companies are hitting high prices (read: they are overpriced) and for all the wrong reasons. When the market catches up, the company basically just spent $50 for a $30 stock. This has been detailed by more than one person in this thread. Academics assume a perfectly rational market. Unfortunately, the market isn't rational in the short-run, and companies are run by people. This isn't to say that buybacks are bad, it's just to say it's a lot more risky without having ANY say in what happens to your money (you can reinvest your dividend, you can't get your buyback in cash without it being entirely beholden to the market).

Companies aren't necessarily going to do better with the money than what you can do with it. Once the money isn't needed for growth (not M&A's), dividend or buybacks should be considered, both have advantages, both have disadvantages.

Juked, you came in with your conclusion in hand and not really wanting any answers or discussion. I'm perplexed by your refusal to even think twice about your already formed conclusion when so many rational (and true) arguments have already been presented to you. What you need to realize is that yes, in academics, the buyback option makes more sense, but there is a reason why academics aren't bazillionaires - it doesn't work quite as neatly in practice. Dividend in hand is a sure thing, stock buybacks are a pretty big crapshoot that requires a lot of faith in the management and the market. See: Ingersoll Rand buyback (Buyback announced at $52. 2-3 months later it was at $28).

On a side note, people have been using Apple as an example of companies flush with cash that needs to get rid of it. Apple can't do that (well, it's not smart to at this point in time) because most of Apple's cash is not in America and would need to be repatriated, which is a really expensive thing to do. A lot of companies have this problem right now, actually.

Meh. It's true that I am not impartial, and I do not intend to be impartial. My previous observations led to my having an opinion. I do however update in some sort of Bayesian way at the consumption of new information. My opinion has changed over the course of this thread, and if you actually care to verify that (it's certainly okay if you don't care) you can see that by reading all of my posts in this thread..

 

[Juked07]

I never said this is a practice I perform, but it does happen. Stock volumes are usually higher days prior and after the ex-div dates. Anyway out of curiosity how much money do you have invested in the market? What are you invested in? How are those investements doing? Just asking to make sure you're putting your money where your mouth is, and not just trolling us.

Ah you work at an options desk. This explains ALOT. Most dividend paying stocks have a low beta. This makes option prices kinda shitty, and the chance that you'll end up "in the money" relatively low. On top of that you have to worry about the stock price fluctuation around the ex-div time. I'de shun dividend paying stock too if I was in the business of options trading. Growth stocks are where its at for making money(or losing your ass) in options.

Not sure why you think I shun dividends from a personal perspective. I think they could be obsolete from an academic perspective. In my professional life dividends are great. Anything that makes options pricing more complicated (dividends are really on the bottom of this list, they're so easy to deal with..) is another opportunity for edge over competitors. We don't shy away from these opportunities. We strive to understand and incorporate them so that we can hopefully do good trades.