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February 16, 2010 – Comments (17) | RELATED TICKERS: AAPL , GOOGL , WLP

What's the point of owning part of a company? I always thought it was so that you could pocket part of the profits that the company made. Or, at the very least, have the hope that a growing company would someday start paying you part of its profits.

So what's the deal with Apple, Google, and WellPoint? All three companies seem to be in sound enough positions to kick back cash to shareholders, but none are -- at least through dividends. What gives? Laziness? Ignorance? A lack of any sort of care for their shareholders?

I looked at all three companies in my article: 3 Companies That Are Shortchanging You

Anybody want to tell me why I'm wrong?

Matt

17 Comments – Post Your Own

#1) On February 16, 2010 at 3:47 PM, Farous (< 20) wrote:

I like dividends too but what about Berkshire Hathaway? The most successful company (arguably) in history led by maybe the greatest investor in history has never, ever given a dividend to its shareholders.

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#2) On February 16, 2010 at 3:48 PM, Chiownknee2 (82.57) wrote:

I would recommend reading this article by Merton H. Miller and Franco Modigliani:

Dividend Policy, Growth, and the Valuation of Shares

 

http://www.journals.uchicago.edu/doi/abs/10.1086/294442

 

Are you really being shortchanged if a company isn't paying out dividends?

 

 

 

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#3) On February 16, 2010 at 4:02 PM, Dobbes (< 20) wrote:

Share repurchases are the new 'dividends.'  Companies prefer them since fluctuations in repurchase amounts are not penalized by investors with stock sales the way dividend fluctuations are.  They also get to juice their statistics "EPS grew 10% last year!"

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#4) On February 16, 2010 at 4:06 PM, Superdrol (96.61) wrote:

Matt,

 

Dude you're stealing my thunder: 

 

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=338732&t=01001545002054304245

 

LOL

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#5) On February 16, 2010 at 4:09 PM, Superdrol (96.61) wrote:

 

Google and apple have hoards of cash.  They don't care about their shareholders.  They should do stock spilts to lower the share price or do buybacks.

 

I sold off all my Google and selling off Apple once I get a small profit.  I don't invest in companies for free and owning shares is not a charity service.

Philip Morris, Diamond Offshore Drilling, ConAgra, Sara Lee, etc, etc....every company is doing something for their shareholders except Google, Apple, and Berkshire.

I'm never owning those companies again.

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#6) On February 16, 2010 at 4:14 PM, TMFKopp (97.89) wrote:

@Farous

Berkshire (Buffett) at least pays attention to its capital allocation policy and has a valid, stated reason for not paying dividends -- Buffett believes that he can do better with investors' money by reinvesting it elsewhere. In that case it's up to investors to decide whether they believe him or not.

 

@Chiownknee2

The link doesn't get you to a copy of the paper. Care to share the summary / conclusion / your thoughts?

What I will say, though, is that very often academic research has little to do with real world results. Take the efficient markets thesis for example. 

Additionally, if what they're saying is that companies are better off using earnings to invest in high-returns projects then that's true. But it's hard to see the value in a company like Apple stockpiling tons of cash and investing it in low-yield investments.

 

@Dobbes

You are exactly right in many cases (I don't think Google or Apple have done much in the way of buybacks). Buybacks suck because they don't give shareholders the choice between buying more shares or taking the cash. Plus the "option" that buybacks allow don't impose the fiscal discipline on managment that steady dividends do.

 

Matt

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#7) On February 16, 2010 at 4:23 PM, Turfscape (39.47) wrote:

TMFKopp wrote:
"Buffett believes that he can do better with investors' money by reinvesting it elsewhere. In that case it's up to investors to decide whether they believe him or not."

Buffett spent 10 years not reinvesting it elsewhere. He stated there was not enough value in the market for him to invest. Then, finally, he found crazy terms with HOG, GE and others, and then found a nice little railroad to buy.

Why wouldn't you give Apple the same benefit of the doubt? Apple had a phenomenal ten year run of growth by renivesting in itself with R&D and the very nice purchase of a chip maker. They've acquired Lala (and I hope to see something come of that in the next year). Apple may be looking for value for expansion. In lieu of that value, why throw the money away? I've seen terrific growth, and there's more room to move up for APPL if they can further develop product, applications and relationships for content.

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#8) On February 16, 2010 at 4:34 PM, TMFKopp (97.89) wrote:

@Turfscape

Sorry, comparing Berkshire to Apple in terms of capital allocation doesn't work for me. Berkshire's entire business model is built on using insurance float and company cash to buy new businesses. Apple is a tech / consumer products company that should be focused primarily on developing new products.

As for acquisitions, Apple has no real history of large or even decent sized acquisitions. Lala was $17m -- that's fine, but it's not going to make a dent in the cash hoard. In other words, Apple could pay a dividend and still acquire companies like Lala.

As for new product development, Apple has come up with some of the most significant products of the decade while amassing the huge cash hoard that it has. I have faith that the company can continue to be successful in its development efforts without having to touch its bank account.

Matt

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#9) On February 16, 2010 at 4:55 PM, Superdrol (96.61) wrote:

Thanks Matt for glazing over my comment.  Actually I made a statement and I'm glad it was recognized.

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#10) On February 16, 2010 at 6:16 PM, Chiownknee2 (82.57) wrote:

"@Chiownknee2

The link doesn't get you to a copy of the paper. Care to share the summary / conclusion / your thoughts?

What I will say, though, is that very often academic research has little to do with real world results. Take the efficient markets thesis for example. 

Additionally, if what they're saying is that companies are better off using earnings to invest in high-returns projects then that's true. But it's hard to see the value in a company like Apple stockpiling tons of cash and investing it in low-yield investments."

-

The best summary of the paper doesn't come from me. It comes from a guy named Fischer Black.

"The choice between a common stock that pays a dividend and a stock that pays no dividend is similar, at least if we ignore such as things as transaction costs and taxes. The price of the dividend-paying stock drops on the ex-dividend date by about the amount of the dividend. The dividend just drops the whole range of possible stock prices by that amount. The investor who gets a $2 dividend finds himself with shares worth about $2 less than they would have been worth if the dividend hadn't been paid, in all possible circumstances. 

This, in essence, is the Miller-Modigliani theorem.

It says that the dividends a corporation pays do not affect the value of its shares or the returns to investors, because the higher the dividend, the less the investor receives in capital appreciation, no matter how the corporation's business decisions turn out."

Food for thought.

Black's article is entitled "The Dividend Puzzle" - and for good reason!

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#11) On February 16, 2010 at 6:38 PM, truthisntstupid (93.32) wrote:

Well, then...let's just grow the book value to the sky!  Tell me, rich guy...if PG hadn't paid an ever-increasing dividend for the last 56 years and had retained all earnings instead...what would a share of PG cost today?  Would you be able to invest in it?  Because that is the kind of thinking behind that article.

  "Earnings that can be reinvested internally to produce an above-average return on equity - a return that is higher than the cost of capital - should be retained and reinvested.  Retaining earnings to reinvest in the company at less than the average cost of capital is irrational."  From The Warren Buffet Way.

If a company persists in doing this, cash becomes an increasingly idle resource.  It will be a drag on return on equity and return on invested capital. 

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#12) On February 16, 2010 at 6:44 PM, truthisntstupid (93.32) wrote:

Every company would become a Berkshire Hathaway.  Only rich people would be able to invest directly in individual stocks.  The rest of us would be restricted to savings accounts, CDs, mutual funds, and newer smaller companies that didn't yet have a decade or two of retaining earnings behind them.

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#13) On February 16, 2010 at 7:33 PM, TMFKopp (97.89) wrote:

@superdrol

I'm basically on the same page as you... except for a couple things:

1) splits are more or less neutral for shareholders. if you have one share and they split it, you now have two shares each worth half as much as the first. in practice, i'm not such a big fan of splits -- higher share prices encourage long-term share ownership rather than trading. You can guess what i thought about the BRK.B split.

2) I almost always prefer dividends over share buybacks. In the hands of a really savvy management team, buybacks can be a good thing, but I've just seen them misused too often.

 

@Chiownknee2

Sounds like academic thinking... Yes, the payment of a dividend doesn't make some magic happen where you create value out of thin air.

However, paying a dividend puts the cash in the hands of shareholders instead of leaving it with management who can end up 1) overpaying for big acquisitions, 2) spending on low-returning capital projects, and 3) leaving it in low-yielding investments.

Among other things, dividends impose discipline on a company's management team -- they know they have to pick only the best projects as long as they have to pay out that dividend.

 

Matt

 

 

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#14) On February 16, 2010 at 7:36 PM, TMFKopp (97.89) wrote:

@truth

"Tell me, rich guy...if PG hadn't paid an ever-increasing dividend for the last 56 years and had retained all earnings instead...what would a share of PG cost today? "

Actually, my primary worry would be what PG management would have done with all of that cash... If they didn't just stash it on the balance sheet earning a low yield, they would have likely squandered it on empire-building that wouldn't have been in shareholders' best interests.

Either way, the bottom line is that if PG hadn't paid that ever-growing dividend, I don't think shareholders would have seen nearly the kind of returns they have.

Matt

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#15) On February 16, 2010 at 7:38 PM, FleaBagger (28.78) wrote:

So you think investors are smarter about how to invest money than Steve Jobs and Eric Schmidt? Really? Why buy them if you think their ROIC will be worse than what you would do with the dividend they pay back to you? If you would reinvest the dividend, do you really want them paying company money to people who will be foolishly taking that money elsewhere? The size of the "cash hoard" is irrelevant to whether they should pay a dividend. As Chiownknee2 points out, best case for the dividend and you are where you would have been otherwise: your stock with less cash on its balance sheet plus your dividend is worth what the stock was worth before. Worst case: we paid out the cash hoard like Matt wanted and now that the economy got hit with Big Correction 2 we can't afford to keep operating at the same level as before: layoffs, R&D cuts, etc. Turns out, it's nice to have extra cash around. Who knew? Oh yeah, everybody knew that, but some people indiscriminately apply the rules for investing in utilities to growth stocks.

I hate for you to feel like I'm picking on you, but these last two articles of yours are pretty much my two biggest pet peeves with The Fool. When I was young and impressionable, and gold was less than $500/oz, TMF was always talking smack about gold, how it had been a poor investment, on average, for the last 100 years (who invests for 100 years?) so I didn't buy it. I bought The Fool's darling asset class, stocks. Then gold doubled as stocks crashed. Oops!

Now you're going after two well-run companies for not paying a dividend, saying that "good, stable dividends say a lot about a company, including the strength of its business and management's view of shareholders," even though plenty of dividend-paying companies are far weaker and unfriendlier to shareholders than Google and Apple. Furthermore, if you know enough about a company to know that it's in a position to pay a dividend, you don't need the dividend to teach you anything about the financial strength of the company. It seems tautological to me.

Times are hard. The future is uncertain. Plaudits to companies that are prudently preparing by saving for the future. Would that other businesses, individuals and government were so thrifty!

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#16) On February 16, 2010 at 9:33 PM, TMFKopp (97.89) wrote:

@FleaBagger

 "So you think investors are smarter about how to invest money than Steve Jobs and Eric Schmidt?"

You know what? As far as this dividend issue goes, I'm going to say yes.

Do I know more about how to run a business than either? Nah. Do I know more about driving technological innovation? Nope. 

But both companies are destroying value by having that cash sit around. They're never going to use it unless they embark on massive capital-wasting campaigns. 

The choice between paying out the dividend and not is not a "six of one, half dozen of the other" choice. On the one hand, the company hangs onto the the cash and continues to have it wasting away in low-yielding parking spots. On the other hand, you give the money back to shareholders -- aka the owners of these companies -- and they decide where the best returns can be found. They can reinvest in the company if they believe that's a good move, or they can take that money and invest it elsewhere where they'll get better returns. 

I mean come on Flea, after all of your sabre-rattling about inflation does it really make sense for companies to keep $20 billion+ cash piles in the bank? Having that money sitting around will just let it get decimated by inflation -- particularly if inflation is as bad as you're predicting.

 

"Worst case: we paid out the cash hoard like Matt wanted and now that the economy got hit with Big Correction 2 we can't afford to keep operating at the same level as before: layoffs, R&D cuts, etc. Turns out, it's nice to have extra cash around."

As I commented elsewhere, if you really think that Apple stands a chance of running through $20 billion to head off economic/business problems, I really, really hope that you're not investing in it right now. A nose-dive like that would... well, let's just say you'd take a big hit on your Apple shares.

 

"Plaudits to companies that are prudently preparing by saving for the future."

These companies are not prudently preparing for the future, they're being lazy and lacking fiscal discipline. When a company hangs onto that much cash, it makes it very easy to embark on boondoggles to try and expand the business, whether or not there's a clear business case for it. When a company pays out a certain amount of its earnings to shareholders, it forces mangagment to be very disciplined about where it invests.

 

Matt

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#17) On February 16, 2010 at 9:35 PM, TMFKopp (97.89) wrote:

@FleaBagger

As for your comments about gold... you already know where I stand on that. As far as I'm concerned, it's more of a speculation than it is an investment. But go wild if you think that that's the best place for your money.

Matt

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