April 30, 2012
– Comments (12)
It just dilutes the number of shares, but lowers your cost basis. All shareholders are in the same position they were before. So...what is the point of it? there must be a reason...
Some ppl are too stupid to realize what you just said
And compounded interest.
You could say the same thing for splits, but history has shown that Companys that offer dividends and splits have done very well for the shareholders.
Do you really want to Pay $100,000 for your next share of PM or would you like to add and build your posistion over time?
Technically, without dividends, or more importantly, the promise of future dividends, there is absolutely no financial benefit to ever purchase an equity. Ever.
Capital appreciation? If the future buyer of my stock, or someone in the string of future buyers, doesn't eventually expect to see a dividend being paid, why would the price ever go up? For the privilege of ownership?
I'm not talking about cash dividends, which I like. I'm talking about STOCK dividends. Where the dividend is paid In newly issued stock
Ah now I understand that first sentence of yours. Stock splits or "stock dividends" are usually done for lowering the price of the stock and making it more appealing to the retail investor. When you see something selling for 19.99 odds are you aren't thinking $20. That marketing gimmick really does work. However, the retail investor has long left this market.
Ah. Sincere apologies. I thought the question seemed a bit simplistic for someone with a +99 score! But then again, you do often ask simple questions as good thought exercises.
Agree with awallejr.
I'm with you on this, in general. But, I can see a potential advantage for a company that wants/needs to reward investors but delay any cash outflow. If a company has extremely strong future growth potential, but is in a stage of R&D or transition and can't sacrifice cash in the short-term, a stock dividend may be akin to deferred compensation for the investors...
That situation would be pretty darn rare, though.
Lack of liquidity could be another reason. Back in 2009 ACAS was obligated to distribute around a $1.40 per share in order to keep its BDC status. IRS rules were changed to allow issuance of shares of stock instead, which they then offered each shareholder .10 in cash and balance in stock or all in stock. ACAS was selling for .70 at one time (was a great buy).
Also ATPG preferred has the option of paying its dividend in cash or stock. So far they have paid in cash, but if they get into a liquidity pinch odds are they would pay in stock.
Yeah, but with those atpg optional dividends, isn't it treasury stock they use?
ryan, yes you are right. I hope my simplistic blogs don't make me seem like an oblivious idiot...I just question everything for some reason.
I was confused as well! Glad I waited to answer! ;) Yes, issuing stock is dilutive and shareholders are generally in EXACTLY the same position they were before from a financial basis. Company's use stock to "reward" or "incentize" investors when they want to preserve cash. If you believe in the philosophy of the company then it is generally a "good" thing as a stockholder. The premise is that while there are more shares, the number of shareholders did not change. I usually see this done on companies with VERY High insider ownership. The Premise is that they want to keep their position (percent of ownership) neutral.
In the majority of cases, I think it's more of a way to reward the insiders than attract new investors. It's also more clearly a "one time" thing. Cash dividends once set become expected and the "punishment" for not maintaining them can be harsh on a stock price.
Overall, if they are done on a company with an improving outlook, while it wouldn't personally impress me, I consider it neutral. If it's a company with no clear path and negative outlook, I'm running, (if I wasn't already!).
Stock splits/dividends are purely a psychological game. A stock might look expensive at $70, but at $35 surely it's a steal! Double your shares outstanding and you can give employees options for more shares of stock and have it seem to them like they're getting a bigger benefit. Yes, it's incredibly stupid that people actually react differently to a stock after a split or reverse split, but the simple fact of the matter is, they do.
IIRC, Benjamin Graham had some favorable things to say about stock dividends in Security Analysis. While I think you're right in that it doesn't really change the game much, I believe he claimed it was good (for companies that need to currently retain earnings) because it provided a level of shareholder accountability and it allowed income seeking investors the incentive to invest in such companies.