Techs Announce 100% Unadulterated Pro Forma Dividends
By Bill Fleckenstein
01/07/2003 18:15
Of Foreign Ennui and EMC : Well, our dividend-cut rally from yesterday was certainly not the shot heard round the world, as most foreign markets ignored it. But early this morning, our casino hosted a ferocious rally that was centered, of all places, in technology, on the back of a couple of storage companies, most notably EMC EMC , saying they were going to make the number. Of course, the number it's going to make is a what-if, hypothetical, pro forma number of a whopping penny. Nevertheless, that was deemed proof-positive that good times were here again, and tech was red-hot in the first hour. Then, following the early-morning blast, the market sold off.
Ephemeral Oratory : After the early selloff, the market rallied again, on the back of the President's speech. But that was it for the day, and from there we sold off pretty steadily into the close. As the box scores show, it was a mixed bag, with no particular theme that I could see other than speculation. Away from stocks, fixed income was higher, the dollar was up, and the metals were thumped, with silver down 2% and gold down 1%. We'll have more about the metals tomorrow.
Disk-Driving on Boulevard d'Bubble : Returning to tech land, there's no point in extrapolating what went on in EMC's disk-drive business, as it had been known for weeks that the company was having an OK quarter. It's not making any money, mind you, but it's having an OK quarter. That is the problem with most companies, and specifically tech companies: They're not making any money, even on the ridiculous pro forma numbers that are used. I continue to be struck by the fact that people still get away with reporting earnings as they'd like them to be. Here we are, almost three years after the bubble burst, and we're still playing the earnings-before-expenses-were-just-terrific game. Of course, the lack of earnings is part of the problem with the dividend-tax-cut-will-save-us belief.
Index Close Change
Dow 8740.59 -32.98
S&P 500 922.93 -6.08
Nasdaq Composite 1431.57 +10.25
Nasdaq 100 1071.85 +10.37
Russell 2000 393.95 -3.05
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Dow Transports 2396.89 -24.82
Dow Utilities 225.78 -5.49
NYSE advance-decline -708 -2,372
Nikkei 225 8656.50 -56.83
10-year Treasury Bond 4.03% -0.041
Pablum vs. Palpable Profit-Sharing : In and of itself, this is just a meaningless mantra. When talking about dividends, people should start to focus on the earnings that go into them, and not all this nonsense about better-than-expected guidance. After all, a company's earnings are what you're supposed to have a stake in when you buy its stock. As I have said frequently, stocks aren't "plays" or "themes." They are fractional shares of businesses, and should be viewed as such. (In addition, you have to consider the relationship between a company's earnings stream and its market capitalization. That's why valuation measures like price-to-earnings and price-to-sales are important. They are what I talk about, in the aggregate, when I say that stocks are still too expensive.)
Share-the-Wealth Health Flash : As for the strength of the earnings that can generate the dividends, a very knowledgeable reader was kind enough to forward some data from Ned Davis that corroborates the view of Richard Russell, which I shared yesterday. Ned Davis's research also notes that dividend payout ratios are not low now, at 52% vs. 57.6%, the average for the last 77 years. Therefore, for dividend yields to rise meaningfully, either earnings have to increase dramatically, or stock prices need to be much lower.
Booster-Shot Serum vs. Truth Serum : Furthermore, his data indicate that when you look at nonfinancial corporations, the dividend payout ratio is up to 160%. Obviously, those companies are paying out more than they are earning, though I amsomewhat suspicious of the data, as things may appear to be worse than they are potentially, due to the effect of noncash items like write-offs, etc. Without having examined the raw data myself, it's possible that this ratio is distorted. The bottom line is, don't expect to see dividends boosted, and if dividend yields are going to be a requirement for investors going forward, it will take lower stock prices to boost yields. It just brings us back to valuations all over again.
Of Cushy Cash Divans and Perishable Dividends : Speaking of dividends, much has been made of the potential for lots of tech companies to pay dividends due to all the cash they're sitting on. Well, it should be noted that while they do have that cash, most of it was a function of the tax deduction they received from employee option expenses when stocks were going up. It is true that they could pay out some one-time dividends, or maintain some small dividends for a while. But this is not a sustainable trend. Ultimately, dividends have to be paid out of a sustainable earnings stream, and tech companies usually drain this by the very nature of their cash-consuming business.
Smoking Gun the Stock Price : So, the fact that tech stocks could rebound in the face of this, as I meant to show by my tongue-in-cheek title yesterday, "eBay, the 'Dividend' Play," is the real tipoff that what's behind this rally is simply more speculation, centered on dividend tax cuts working a magic that does not exist. Ladies and gentlemen, nothing has been a quick fix since the bubble burst. During the mania, we had a misallocation of capital that has led to the problems we are now facing. We had an exhaustion of the economy and the consumer, we took on too much debt, we put up too much capacity. That's why 12 rate cuts haven't worked. That's why the last tax cut didn't work. And that's why this dividend tax cut and the rest of the package isn't going to solve the problem.
The View from 'Capital' Hill : That said, Congress needs to pass this package. As I noted yesterday, I am all for reducing the government's take of the economy. This is a good thing. Ending the double taxation on dividends is also a good thing. But all this hype about dividends has just provided another reason to speculate once again, as has been the case during most of these bear market rallies. People continue to let hope cloud their view of reality, deeming anyone like myself who questions the conventional wisdom a pessimist. That is not true. I am an optimist. On the other hand, I am a realist. I know that hoping things will get better, and making up baseless reasons for this prediction are only a recipe for losing more money. |
