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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: carranza2 who wrote (110142)	1/2/2002 7:59:12 PM
From: Wyätt Gwyön	Respond to of 152472

if co. XYZ has a cash stash of $1bn which is available for payment of dividends but does not pay them, then the share price of XYZ should be the same as that of a comparably cash-equipped dividend-declaring company. i must respectfully disagree. the problem is, there is not enough money in the pot to pay more than a couple years' worth of dividends, so you must take into account the "renewability" of the source. I'll take my dividend in a higher stock price, especially if the tax consequences are that I pay capital gains instead of income taxes. this, of course, has been the mantra for the last decade. but its Achilles heel is that eventually, somebody may stop paying you a 60 PE for your stock. when the bubble ends, it's nice to have the cash flow of a dividend. Such a company can fund more R&D, engage in more ventures, etc. That is the fallacy in looking at dividend payments as a gauge of a corporation's financial health or prospects. this is the typical response, but it doesn't hold water. all you need to do is look at earnings growth for each rolling 10-yr period, and you will see that the past 10 yrs were remarkable only for their low dividend payment. earnings and productivity grew much faster in other periods, like the late 20s and 60s. do you think companies didn't engage in these activities in the past? even now, the avg payout is only 28%, leaving 72% extra to fund all those other goodies. and another point is, eventually a co starts trying to do too much, and they end up wasting a precious resource--their shareholders' money! when this is again considered precious, demand for dividends will rise. now with 36 billion on hand, and gaining an extra billion each month, MSFT has too much money to deploy effectively in its businesses. eventually, if QCOM is lucky enough to become a great company like MSFT, they too will face a similar dilemma (although one could argue that they already are good at wasting money on investments, which would be my agency-risk argument that i believe applies to all companies, not just the one great tech co (MSFT)). one of the main reasons why investors historically demanded dividends is agency risk. that is, the people who run the co have interests that are not perfectly aligned with your own. and they may waste the money on stupid schemes. it is better for them to be on a "leash", which dividends provide. if you simply say QCOM has 2.37 cash per share, so let's value it as if it paid that amount every year, it is a little nonsensical. 2.37 is simply the amount qcom has managed to accumulate over its many years as a corporation, and includes large amounts of money from financing activities. you might as well say that since the S&P div yield is 1.6%, meaning the price/div ratio is 62.5, that MSFT should have a market cap of $2.25 TRILLION since it has $36 billion in cash. but of course MSFT has lots of other things it wants to spend that cash on besides dividends (in fact, Balmer doesn't even want to pay a dividend because he knows it could lead to a more rational, less Bubbleonian valuation). e.g., $6 billion a year to buy back shares...various investments to waste money on (cable investments?), yada yada so realistically, only a fraction of the money pot would go to pay dividends if MSFT does eventually pay. likewise, QCOM would only pay out a fraction of cash on hand. traditionally, the payout ratio of dividends from earnings is 45%; now it is 28%. i think if you want to bring cash into the valuation picture, what you can do is deduct the 2.37 per share from the current price and then run the PE numbers (if you like to do it that way; although deducting the entire cash amount is probably too aggressive because obviously they have working capital needs...in any case, deducting a buck-fifty from the price doesn't really affect the forecasts, and is well within the margin of error of PE and earning guesstimates, which is probably why you don't see analysts deducting cash very much [except in extreme cases]). but simply because they have some cash doesn't mean they get a multiple of that cash in the valuation. A good reason to be like Buffett and not rely too much on the rear-view mirror when investing. Berkshire is, i believe, the largest recipient of dividend income in the US. partly as a consequence of this, they are the largest taxpayer in the US.