No Dividends Necessary

The growing  trillions of dollars in cash reserves held by the public [non-financial] corporations in the US has hit historic highs recently, with severe appreciation in sight.  Yet the money market rates and treasury yields being offered to them are not far from their historic lows.  It is only a matter of time before the shareholders will begin a Middle-East-size revolt and force these companies to make a decision pretty quickly to either put that money to work or send the shareholders bigger dividend checks.  I personally do not believe that true growth companies should issue a cash dividend.  I am not opposed to stock dividend or spinoff situations, but cash is something that I firmly believe should only be used to improve and grow the business and not just to appease investors.  In fact, I actually prefer that the companies we invest in do not pay us a dividend at all, but rather put that money back into the company in order to grow the business, and ultimately create even more critical shareholder value.  When a company decides to increase its dividend it is also telling me that the management is seeing limited opportunities for its business.  This is also an indication that the main growth stages are behind them.  The rationale behind this is that if the management was qualified enough to grow the business to this point and earn our investment in the first place, then they are probably qualified enough to further grow the business by using this cash to either develop or buy new businesses and/or projects.  If they are not qualified enough to do so, then why are we investing in them in the first place?  Qualified   management is a key part to any company.  Bad management is usually the key part to any problem the company is having.

Further, when investors claim that the dividends are an “extra” bonus they are entitled to for being a shareholder, and must be issued to magnify the return on investment, it is apparent that they may not have their facts straight, and are either being misled by the media or incorrect financial advice.  When investing in a company, especially a public one, the investment is being made for the purpose of being part of the long term fruition of the company, because success there could ultimately lead to an increased value of the main investment—the stock price.  But when cash is taken out of the company’s balance sheet and issued to investors, it is also lowering the value of the company, since the assets are no longer available for future use.  This use may be for growth or possibly even to save the business from tough times like we just overcame.  This is why any time a company issues a dividend, the stock price is immediately lowered by the cash dividend amount on the X-dividend date.  Investors are not actually getting anything from the dividend payment, but rather just moving money from one of their pockets and into another.  If some investors are in need of money, then they should just sell some stock.  There’s no need to make everyone suffer.

The whole argument that automatic dividend reinvestment [back into the stock] is a great way to increase value is completely flawed.  Why would anyone ever want to lose the ability to determine when is a good time to invest?  This may be good for passive investors for convenience’s sake, but anyone carefully monitoring their investments should always have control of what they do with their own money.   Lastly, we will never force our companies to spend “our” cash aimlessly, but on the other hand, hoarding it with no particular plan will make us ask tough questions.

About Ron Reuven

Yaron “Ron” Reuven is the President & Chief Investment Officer of Reuven Capital Investments, LP. His expertise is in business valuations, financial model & theory analysis, and financial industry compliance.
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