Let's put some links together on the broad subject -- one of great relevance to all the themes of this blog -- of corporate dividend policy. How do companies decide how much cash their stockholders get on a regular basis?
Here's a pdf from Deutsche Bank on the theory and practice.
And here are a few words from scholars at UPenn.
One piece of the puzzle is the fact that individuals in the US are generally taxed more for dividends than for the capital gain on the sale of stock. The dividends are "ordinary income." So, shouldn't a rational investor want the company to keep reinvesting its cash, building up that strike price, and earning him that capital gain? Why does anyone even want a dividend?
On the other hand, a stock that doesn't pay dividends has a Madoff-like air to it. I'm holding on to it so I can sell it at a higher price to someone else, you say? Well, why would he want it? Because he expects to sell it to a yet greater fool further down the road? Somewhere, somebody has to receive a stream of income/cash in order to anchor those capital gains. That, at any rate is one common sensical take on the issue.
At any rate, once a company has a history, a track record as to the quantity of dividends it pays, there is a good deal of pressure to keep it up. The dividend level is "sticky." Why? Because any departure can be taken as a signal. A cut in dividends can be considered proof the company is in trouble and desperately needs to hold onto its cash. An increase in dividends can also be taken as a signal that the company is in trouble, specifically that it is making a desperate move to perfume that fact!
Consider that Lehman Brothers, the broker-dealer that famously declared bankruptcy in September 2008 and set off that autumnal crisis, had increased its own dividends by 13% earlier in the year. You may as well give that some consideration -- if you are the member of a board of directors that institutes such a cut, signalling theorists will consider it for you!
Finally, if you are an investor, you might want to consider a dividend reinvestment plan. Especially because it goes by such a neat acronym. Such a plan is known as a DRIP.
Showing posts with label dividend policy. Show all posts
Showing posts with label dividend policy. Show all posts
Wednesday, September 29, 2010
Monday, May 17, 2010
Oil Tanker Company
DHT Maritime Inc. is the operating company that owns and leases out a fleet of oil tankers -- the name letters "DHT" originally stood for "double hull tankers," but since at least 2005 they haven't properly stood for anything -- the letters are simply the name.
Anyway, on March 1 of this year, DHT Maritime completed transactions that made it a subsidiary of a holding company, appropriately called DHT Holdings, organized in the Marshall Islands.
Still more recently, DHT Holdings has been engaged in a proxy dispute with MMI Investments, a New York based hedge fund we've encountered before in this blog. It's DHT's largest shareholder, currently owning 9.7% of DHT Holdings' equity.
On Friday, May 14, MMI and DHT have reached an agreement. Here's the filing. The gist of it is that DHT Holdings will expand the size of its board of directors to include MMI's nominee, Robert Cowen.
One of the issues involved in the proxy fight was the question of paying dividends and/or starting a share buyback. Previously, DHT's chairman has said that the company "will certainly consider reinstating the dividend" or starting a share-buyback in the future, but conditions in its industry do not allow for that just now. There's nothing explicit on the dividend/buy-back issues in the peace treaty.
Anyway, on March 1 of this year, DHT Maritime completed transactions that made it a subsidiary of a holding company, appropriately called DHT Holdings, organized in the Marshall Islands.
Still more recently, DHT Holdings has been engaged in a proxy dispute with MMI Investments, a New York based hedge fund we've encountered before in this blog. It's DHT's largest shareholder, currently owning 9.7% of DHT Holdings' equity.
On Friday, May 14, MMI and DHT have reached an agreement. Here's the filing. The gist of it is that DHT Holdings will expand the size of its board of directors to include MMI's nominee, Robert Cowen.
One of the issues involved in the proxy fight was the question of paying dividends and/or starting a share buyback. Previously, DHT's chairman has said that the company "will certainly consider reinstating the dividend" or starting a share-buyback in the future, but conditions in its industry do not allow for that just now. There's nothing explicit on the dividend/buy-back issues in the peace treaty.
Monday, October 27, 2008
More BCE Excitement
Common shareholders of BCE Inc., the holding company of telecomm giant Bell Canada, have filed a class action lawsuit demanding the payment of a dividend they had expected this summer.
Black-letter law is that no one can claim a right to a dividend. If an investor wants regular payments as a matter of right, the instrument he wants isn't a stock, it's a bond. Dividend policy is a matter within the business judgment, i.e. the nearly-unlimited discretion, of the board of directors.
The real point of the lawsuit, it would seem, is to derail the underlying deal. What the owners of equity do get, instead of a guarantee of payments, is a right to have a say in the major corporate decisions. That right is the basis for the existence of this blog, after all. I'm not entirely clear on how, in the plaintiffs' view, they've been deprived of that right here, but it seems that "pay us the dividends" is more a measure of damages in their eyes than the alleged legal injury.
The privatization of BCE will be (if the teachers'-pension folk behind it manage to pull it off) the largest leveraged buy-out ever. The deal was signed more than a year ago, though the closing has had to be delayed because the prevailing buisness climate has hardly been conducive to such wheeling-dealing.
A bond rating agency has estimated that if the deal does go through this December as now scheduled, BCE's consolidated debt will be C$42 billion, which is more than twice last year's revenue.
The deal has already generated some fascinating litigation. If you follow that link, you'll get to my earlier discussion of a challenge to this same transaction by bondholders.
So it may yet generate more.
Black-letter law is that no one can claim a right to a dividend. If an investor wants regular payments as a matter of right, the instrument he wants isn't a stock, it's a bond. Dividend policy is a matter within the business judgment, i.e. the nearly-unlimited discretion, of the board of directors.
The real point of the lawsuit, it would seem, is to derail the underlying deal. What the owners of equity do get, instead of a guarantee of payments, is a right to have a say in the major corporate decisions. That right is the basis for the existence of this blog, after all. I'm not entirely clear on how, in the plaintiffs' view, they've been deprived of that right here, but it seems that "pay us the dividends" is more a measure of damages in their eyes than the alleged legal injury.
The privatization of BCE will be (if the teachers'-pension folk behind it manage to pull it off) the largest leveraged buy-out ever. The deal was signed more than a year ago, though the closing has had to be delayed because the prevailing buisness climate has hardly been conducive to such wheeling-dealing.
A bond rating agency has estimated that if the deal does go through this December as now scheduled, BCE's consolidated debt will be C$42 billion, which is more than twice last year's revenue.
The deal has already generated some fascinating litigation. If you follow that link, you'll get to my earlier discussion of a challenge to this same transaction by bondholders.
So it may yet generate more.
Wednesday, April 2, 2008
Dividend policy
On principle, I'm a big fan of dividends.
The value of a stock should logically be the value of what a buyer thinks will be the stream of dividends it will generate into the indefinite future, discounted to present value.
Simple example: suppose I buy $100 of stock. I had other choices. I could have just put that money into an interest-bearing bank account. At (let us say) a 5% annual rate of interest. In that case, I might have received an income stream from this investment of $5 a year forever.
Why would I take money out of such an account to buy a share of stock unless I expected it to be at least as valuable as the same money was within the account? If there is no good reason, then presumably we're on firm ground in using that measure of value: the income stream I expect the stock to produce analogous to that safe $5 a year from the bank, IS its value.
That brings us back to the stream of dividends. Now, if a stock is increasing rapidly in value (some people will tell you) it isn't an "income stock" but a growth stock, and you as an investor shouldn't necessarily expect dividends.
This, to me, does not compute. If I own the stock only for its resale value, I'm betting that it will be worth a lot to the fellow after me. But what would it be worth to him, except its expected dividend stream? Somewhere we have to get a dividend stream, or else the value of a stock is just the arbitrary result of a "greater fool" theory.
If I was foolish enough last year to buy a pet rock, I can make it worthwhile if I find a greater fool than I, next year, and sell it to him for more. Growth stocks are either stalled income stocks (hoping to get to the dividend creation in the future) or they're pet rocks sold to ever greater fools.
Which is it?
The value of a stock should logically be the value of what a buyer thinks will be the stream of dividends it will generate into the indefinite future, discounted to present value.
Simple example: suppose I buy $100 of stock. I had other choices. I could have just put that money into an interest-bearing bank account. At (let us say) a 5% annual rate of interest. In that case, I might have received an income stream from this investment of $5 a year forever.
Why would I take money out of such an account to buy a share of stock unless I expected it to be at least as valuable as the same money was within the account? If there is no good reason, then presumably we're on firm ground in using that measure of value: the income stream I expect the stock to produce analogous to that safe $5 a year from the bank, IS its value.
That brings us back to the stream of dividends. Now, if a stock is increasing rapidly in value (some people will tell you) it isn't an "income stock" but a growth stock, and you as an investor shouldn't necessarily expect dividends.
This, to me, does not compute. If I own the stock only for its resale value, I'm betting that it will be worth a lot to the fellow after me. But what would it be worth to him, except its expected dividend stream? Somewhere we have to get a dividend stream, or else the value of a stock is just the arbitrary result of a "greater fool" theory.
If I was foolish enough last year to buy a pet rock, I can make it worthwhile if I find a greater fool than I, next year, and sell it to him for more. Growth stocks are either stalled income stocks (hoping to get to the dividend creation in the future) or they're pet rocks sold to ever greater fools.
Which is it?
Tuesday, April 1, 2008
More on Office Depot
The complaints that have led some shareholders to contest two seats on the board of the office-supply company, Office Depot, ahead of an upcoming annual meeting, provided me with the gist of yesterday's entry here.
ODP has been doing rather poorly of late when compared with its rival, Staples. I suggested yesterday that just looking at the stock price move in isolation might be misleading -- one should look at dividend policy, too.
Although that's a sound general rule, it doesn't help the case for ODP's incumbent management any. This is from ODP's website: "The Company has never declared or paid cash dividends on its Common Stock and does not intend to pay cash dividends in the foreseeable future."
Staples, on the other hand, just last week paid a cash dividend of $0.33 per share. It has been in the habit of paying dividends each March, like giving away an Easter egg, and this year's was larger than that of either of the two eggs. Though that may sound flip of me, I'm a very pro-dividends kind of guy, and I'll write something more on that point tomorrow.
So if ODP is going to justify their underperformance vis-a-vis Staples, it won't be on the basis of the dividend stream! What might they say, though? Well, as it happens, ODP did send out a letter to its shareholders yesterday making its case.
It didn't say anything at all about the ODP/Staples comparison. It did acknowledge recent troubles, but qualified that with the comment that there already has been a lot of turnover in board membership lately. There is no need for the dissidents' proposed "fresh faces," then, since the incumbents are new enough to still be fresh.
The statement also discussed in general terms the ODP turnaround plan these fairly-fresh faces have produced and should be left free to execute. Slowly growth to enhance focus, store remodelling, loyalty programs, revisions in both catalog and on-line marketing, etc.
There's nothing in it that bowls me over. If I had this stock, I'd be ticked off. But would I fight, or would I just sell it. That's always the question in these situations, isn't it?
ODP has been doing rather poorly of late when compared with its rival, Staples. I suggested yesterday that just looking at the stock price move in isolation might be misleading -- one should look at dividend policy, too.
Although that's a sound general rule, it doesn't help the case for ODP's incumbent management any. This is from ODP's website: "The Company has never declared or paid cash dividends on its Common Stock and does not intend to pay cash dividends in the foreseeable future."
Staples, on the other hand, just last week paid a cash dividend of $0.33 per share. It has been in the habit of paying dividends each March, like giving away an Easter egg, and this year's was larger than that of either of the two eggs. Though that may sound flip of me, I'm a very pro-dividends kind of guy, and I'll write something more on that point tomorrow.
So if ODP is going to justify their underperformance vis-a-vis Staples, it won't be on the basis of the dividend stream! What might they say, though? Well, as it happens, ODP did send out a letter to its shareholders yesterday making its case.
It didn't say anything at all about the ODP/Staples comparison. It did acknowledge recent troubles, but qualified that with the comment that there already has been a lot of turnover in board membership lately. There is no need for the dissidents' proposed "fresh faces," then, since the incumbents are new enough to still be fresh.
The statement also discussed in general terms the ODP turnaround plan these fairly-fresh faces have produced and should be left free to execute. Slowly growth to enhance focus, store remodelling, loyalty programs, revisions in both catalog and on-line marketing, etc.
There's nothing in it that bowls me over. If I had this stock, I'd be ticked off. But would I fight, or would I just sell it. That's always the question in these situations, isn't it?
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