Art, actually, established companies that are generating excess cash pay two kind of dividends, the first, the cash dividend is taxable (sometimes at 50% rate, depending on the state you are in). The second type is avoidance of the tax system, they buy back shares with the excess cash they were going to pay out as dividends (thus increasing the holders proportion of the company) these dividends are not taxed at all. So, if a company pays 1% dividends and buy back 2% of its share every year, the actual payout of dividends is 5% if you are in the 50% tax bracket.
As for debt, any company that can borrow, should borrow (but only to the extent that their EBT covers interest payment by at least a factor of 3 or more). The reason is quite simple, a well run company will have return on assets emplyed in the business in the range of 15% or higher, thus you want to increase assets on which you can get such returns to the max point of safety (coverage), this drastically increases return on stock holders equity.
Zeev |
