Jock:
I know your response. I have picked out the super winners. Fair enough Dipy. Go ahead and add seven tech losers to the list--such as AAPL or MOT or super losers like Wang. Guess what? The combined list of super winners and super losers would still obliterate any list that you could possibly compile using your formula.
We don't have to compile such a list. It's already there in Jeremy Siegel's "Stocks for the Long Run". Look up the chapter, "The Nifty Fifty Revisited". You can see a table showing that the tech darlings of the day -- IBM, Burroughs, TI, Xerox etc., all generated poor to abysmal returns going forward. The companies that provided superior long-term returns are the ones that also happened to pay increasing dividends.
Why is that table so important? Because it covers the time-span from 1973 to 1996 -- encompassing a bear-market (1973-74), a sideways market (1974-82) and a bull market (1982-1996). So there is a lot to learn from that table, unless you are one of those who think that bear-markets have been repealed!
Only when a company is somewhat lacking an investor's absolute faith must it appease the investor by paying out dividends.
I can't help but smile. You are not describing GE, JNJ, MRK, MMM, PG, AUD, MCD, HWP, DIS, WMT above, are you? :-)
What should Phillip Morris have done with its dividends? That's easy. It should have invested the cash flow it was generating into Microsoft, EMC, Intel, Cisco, Dell, AOL, and Yahoo. That would have been the proper strategy for a "mature" company in a cash flow positive industry. Instead, it squandered the opportunity by paying a paltry dividend that it increased year after year. Can you say "Last Call for Phillip Morris?"
I disagree. These companies don't have to decide between re-investing the earnings and paying out dividends -- they can do both! And not only that. They can also buy back their shares, so their pool of shares is actually shrinking. Contrast this with the tech companies where the number of shares keeps increasing because of the zillions of stock options that are being given out.
Also I would rather have my company pay out the dividends than "invest", i.e. squander, it in areas that fall outside their area of competence. Witness the number of companies that have been selling off or spinning off some of their divisions because they don't fit with their "core area of competence"? JNJ or MO don't invest in ASIC or computers or software not because they don't have the money but because those areas fall outside their circle of competence.
And yes, Berkshire Hathaway doesn't pay dividends. But you must note that even a business genius like Warren Buffett has admitted that he finds it rather hard to re-invest the earnings profitably in recent years, as the cash flows and the assets of Berkshire keep rising year after year. |
