Dividend nonsense

In a classic “Sense & Nonsense in Corporate Finance”, the author, Louis Lowenstein, debunks some wrong notion on dividend policy.

“The central issue of dividend policy is how well a company uses its resources compared to the available alternatives, notably those avail­able to shareholders. That point of view, however, necessarily tends to ignore other, short-term considerations, such as day-to-day hap­penings in the stock market. A great deal of ink has been spilled by scholars who believe that dividends are useful as a signal to the mar­ket of management’s expectations about future earnings. A higher dividend is said to signal its conviction that the earnings are real and will continue to grow, and this signal, in turn, is expected to produce a higher stock price. None of this makes much sense to me. Divi­dends can give inaccurate prophecies, as happened at Ford in 1979­1981, as well as accurate ones. But prophetic or not, if a company allocates capital intelligently and if it communicates those decisions with candor, dividend signals are irrelevant. Dividends are too im­portant a business issue to be relegated to the role of (trivial) news carrier for the stock market.”

Additional Readings:
The Wal-Mart Effect :
Off-Topic Readings:
Parting Thought:
  • I read annual reports of the company I’m looking at and I read the annual reports of the competitors – that is the main source of material. – Warren Buffett
Advertisements
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s