DIVIDEND AND RULE
Re: Michael Craig’s The
Groucho Marx Theory of Dividends:
Michael Craig is wrong on his theory of dividends. They are not
an inefficient use of capital but part of the cost of capital.
Double taxation of dividends only increases that cost of capital.
Every graduate with a degree in finance, accounting, economics
knows that. Because dividends are taxed twice, they make the cost
of equity sources of capital more expensive than debt. The only way
to reward cash to stockholders in a tax-advantaged way is to buy
back stock — something that many companies do and is considered a
good sign by many investment experts.
To say that paying dividends is a management failure is wrong.
Often the most economically efficient use of capital is for a firm
to return some of that capital to stockholders who can better
invest that money elsewhere. Taxing dividends unfairly causes
companies to over-invest in unwise projects and borrow too heavily.
Corporate history is full of tragic episodes of companies
withholding dividends, borrowing more and going on a binge of
unwise acquisitions.
Evidence from some studies suggest that the stocks of large
companies that pay higher dividends perform better. Growth
companies with super high growth rates should reinvest their
earnings into their business. But large successful companies that
cannot maintain super high growth rates because of their large size
and market shares should send some earnings to their owners and
allow them to diversify their portfolios on their own. Lowering
taxes on dividends will make this easier.
— Jim Moroney
Cumming, GA
Regarding Michael Craig’s rant against dividends, where has he been
for the past ten years? If ever there were a time to reconsider the
heads-I-win, tails-you-lose attitudes of corporate management, this
is it.
Leaving America’s management teams with too much cash is like
giving a sailor shore leave, a pack of Trojans, and a case with
Jack Daniel’s. Something good might come out of it, but what are
the odds? If he loves Bill Gates, how does he feel about Dennis
Kozlowski? Or Kenneth Lay? Or Bernie Ebbers? Or the United Airlines
team? Or the SwissAir management team? Or the geniuses at Global
Crossing? Or the bright boys at Federal Mogal?
Fact: academic studies show that most corporate m&a
transactions don’t work out for the buyer.
Fact: AT&T’s shareholders probably would have been much
better off if the company had continued a regular, high payout
rather than stumbling through the m&a underbrush in search of a
telcom El Dorado. And this is one of Craig’s examples of a company
that did it right!
Fact: Most CEO’s think they own the goshdurn company. They don’t
have any trouble finding a way to get a current, cash-based return
for themselves. They ought to extend that thinking to the
shareholders who really do own it.
There is no scarier sight to than a CEO with a wad of cash in
the bank and a yearning to reshape his industry.
Get that money to the shareholders!
— Leland E. Hutchinson
Chicago, IL
Companies don’t pay dividends because they think you have better
ideas than they do. It’s because they don’t have current projects
that will meet their minimum requirement for internal rate of
return. You don’t necessarily need a better idea yourself. You can
do what you like with the money. Buy other stocks in companies that
can use the capital. Buy more Microsoft stock if you like. They
beauty of the process is that you decide. You might wind up funding
the next great American success story.
Hammering dividend payouts with additional taxes curbs your
freedom of action and results in the government wrongly influencing
capital markets. Another result is companies end up holding
mountains of unused cash which invites corporate raiding (another
story altogether).
It’s ironic that you should choose Microsoft as an example since
the government has been trying to curb their activities for the
past five years. No one would be shocked to get the letter you
imagined from Bill Gates ever since the government has been trying
to keep them from making money.
— Ed Callahan
Regarding your article on dividends, a couple of thoughts. First, a
Board’s primary objective should be to maximize shareholder value,
which can be effected through capital gains (i.e., reinvesting for
future growth) or through dividends (i.e., return of capital). As I
see it, reducing or eliminating the tax bias against dividends is
beneficial precisely because it will promote the free flow of
capital toward its most productive use. If a company determines
that the next growth project would deliver subpar returns on
capital, then the Board should return the capital to the business
owners and allow the individual shareholders to redeploy the
capital as they see fit. Perhaps some other management team in some
other business has a use for the capital that is superior. Better
that capital be returned and redeployed than be bottled up in a
company with suboptimal return potential or that has to swing for
the fences to diversify — that’s just bad corporate finance.
Finally, I agree completely that any attempt to fix the
inefficiency should focus on corporate deductibility rather than
tax breaks to individuals.
— Paul Berman
Certain industries are very mature and new investment is not
warranted for all of the profits generated. Should they start to
dabble in some new sidelines? No! What do they know about other
businesses than their own? Better they return the money to the
shareholders who can buy shares of the same company or another
company. This is more efficient use of capital, despite your false
thesis.
— Basil Weir
Michael Craig replies: I agree with my
critics that paying a dividend is better than making bad
acquisitions or letting the CEO steal the money. But neither is as
good — for investors or the economy as a whole — as investing the
money to improve the company. If a company’s only choice is to pay
dividends or do something stupid, you should take your money
elsewhere. That’s how capital moves efficiently. Corrupt, inept
companies won’t be any more responsible by paying dividends. But
they will deprive better companies of capital, by competing for it
with good companies who will be judged by their ability to pay
dividends, or by forcing those good companies to divert money from
worthy projects to maintain the dividend. As Groucho Marx said,
“Those are my principles. And if you don’t like ‘em, I’ve got
others.”
COUNTERREVOLUTION
Re: Francis X. Rocca’s Forty
Years of Sexual Intercourse:
The writer who commented on the 40th anniversary of the sexual
revolution seems to have a few things wrong in his analogy. In
comparing the “sexual revolution” in the same class as economic and
religious liberty is erroneous. First. the latter two meant
progression for people in the realm of freedom while the former
actually is an enslavement with dire consequences. Neither is it
new in our culture. There have been more than a few periods in
American history where sexual promiscuity (the proper term for that
type of liberation) has been in the forefront and each time it has
resulted in disaster for those who practiced it. The same is true
today with AIDS, venereal diseases on the rise, hepatitis C, etc.
Already there are signs that this type of “liberation” is becoming
passé. So while it may be sometime before we get back to the
“old morality,” we will get there. Thank you.
— Pete Chagnon
I once heard it said that the only thing revolutionary about the
sexual revolution was that people talked more about sex than they
used to. I laugh when I hear the abortion liberals on one hand
imply they invented sex and on the other scream bloody murder about
“the era of back alley abortions” that preceded the sexual
revolution. Hmmm — which was it?
— Ed Callahan
BORN TOO LATE
In his article “Senator
Kerry on Parade,” Lawrence Henry makes the intriguing
suggestion that the Democrats nominate rising star Rep. Harold Ford
(D-Tenn.) for president.
Fortunately (or unfortunately), however, that’s an impossibility
in 2004, as Ford has not yet reached the constitutionally mandated
minimum age of 35.
This May he will turn 33.
Best regards,
— Richard M. Lender
Kansas City, MO
SERIOUS TALK
Re: Jackie Mason & Raoul Felder’s
Stop the Killing:
I have been guilty of seeing Mason as not much more than a
lightweight; more of a clown than a commentator. But no more. He
sees clearly what most of us either can’t or won’t.
Perhaps you can persuade him to write more on this and other
matters.
— Dan Rusen
I just finished reading your amazing article, and felt compelled to
respond, something I have never done before.
All of us, as Jews, have I am sure thought seriously how we, if
we were in the position to do so, would resolve the problem of the
Palestinians and all the latest suicide bombings.
Within the past number of months, I had come to the realization
the only answer to our problem in Israel was in fact to move them.
My thoughts along with many of my friends, both Jewish and
Christian, feel the Arabs are not interested in peace at any cost.
We had estimated it would take about $10 billion to build them
homes, across into Jordan, and to literally move all of them over
there. It would of course be necessary for the West, with the U.S.
as the precipitating factor, to assist in this project. The overall
cost would be insignificant over time of course. The borders of
Israel would then include all of the present West Bank, and all of
the Gaza area.
Interestingly, I attended a guest speaker at our local
synagogue. The speaker is a journalist, a Muslim journalist of East
Indian background, who spoke on the problem in Israel. He summed up
his excellent presentation with the exact same program that I have
just outlined..!!
The stage of world opinion will be negative no matter what the
Israelis do. There is no one to truly come to our assistance but
ourselves. Lets beat the drums and get all 13 million of us on the
same page!!!
Yours truly,
— Harry Caine
Tsawwassen, B.C. Canada
LONG TIME NO HEAR
Re: Ben Stein’s
Iraq and North Korean in Cahoots?
Apparently, everyone failed to notice that as a direct result of
the DPRK providing weapons to Iran during the 8 year war, all
diplomatic relations between North Korea and Iraq were severed by
the Iraqi regime. According to Iraqi Deputy Prime Minister Dr.
Tariq Aziz in an interview with Ted Koppel last month (ABC’s
“Nightline,” 12/04/02), no relations were ever re-established — at
all. There has been no communication between Pyongyang and Baghdad
for the past 22 years. Period.
— unsigned
