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.”
The Wal-Mart Effect :
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