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Dividend Divisions

The principles behind the principal. Plus more, including sex.

1.5.03

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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

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