Why bother keeping shareholders happy?

In My Humble Opinion
1

Over and over again, I hear analysts talking about ‘keeping the shareholders happy’ when discussing big corporations. This seems to require paying cash dividends to people who own stock. A major reason for the outsourcing of American jobs was so that the shareholders would be able to get bigger dividends. But that strategy seems to me to be very shortsighted, because the customer is no longer getting the quality of product that they have been used to, and they are likely to abandon the brand.

If the stockholders get upset and sell their stock, what happens? The company loses market value, but how does this hurt it? The only thing that I can think of is that it reduces the company’s ability to borrow money. But borrowing money seems to be how many companies get into trouble. (Remember Pan American Airways?) And other companies have resorted to shenanigans to make it seem like they were making enough money to pay a dividend. Companies which have had very poor performance still pay dividends. General Motors paid out over 1 billion dollars in dividends the year that the company lost 8 billion dollars.

Americans were given the rationale that companies had to ‘stay competitive’, so they outsourced the jobs. What that actually meant was that the companies had to pay out bigger dividends, so they cut production costs drastically, while continuing to charge the same price for their products, if not more. And the quality has just gone down and down. Things that snap together, but don’t snap apart, so repairing them is almost impossible. Motors made with bearings which are so soft that the motor starts seizing up after only a few months of operation. Items which fall apart almost as soon as you open the package.

We are spending the same amount to get inferior products, all so that a few people who own stock can get rich sitting by the pool. Okay, I am exaggerating a bit about the getting rich part, but people are getting an income for doing nothing while most of us are getting stuck with crap. After you buy something three or four times, you realize that it would have been cheaper to get the more expensive item, which is made locally, with quality parts. If you can find one. Because so many companies have been run out of business by people selling crap.

2

Companies need money in the form of capital investment or loans, so they can invest in the things that will make them profitable, usually through growth. If they don’t have the means to do that, they run into trouble. It isn’t really about having money, it’s about being able to use money.

3

More directly, the shareholders elect the board of directors, who can fire the CEO. It takes an awful lot of shareholder unhappiness for this to happen, but it does happen.

4

Close, Rysto, but lacking. The correct answer is “because they own the company.” The CEO is an employee, hired for a job. That job, like all jobs, is to do whatever the owner wants. What the owner wants from the CEO is dividends and profits. If he doesn’t deliver that, he can be fired, and if he doesn’t even try, he may be guilty of a crime.

They own the company. Wrap your head around it.

5

You understand that what you are asking is “Why should a hired executive team care about making the owners happy?”

Of course how to make the owners happy is a matter of opinion. In point of fact larger dividend is less the method of choice in recent years compared to in years past; investing in greater growth rate is. You can see from that table that the average dividend yield for the S&P500 recently has under 2%; before 1990 3% to under 6% was the more typical range.

6

If a public company underperforms and its stock value declines too much, someone else may come along buy all of the stock, take the company private, replace the management team an run the company how they think it should. If you own the company you get to make the decisions.

7

There are many companies that use out-sourcing don’t even offer dividends to the shareholders. The real purpose to do out-sourcing is to be competitive in the market place against the competition. If you make boots for $30.00 and can only sell them for $22.00 wholesale, and your competition can make the same boots for $5.00 and sell them for $20.00 wholesale, you have to change your business model or you will be out of business soon. The competition is doing out-sourcing. If it makes the company profitable instead of going out of business and the board decides to do so, then the shareholders will participate in the company’s return on investments. You have retirement savings in an IRA or 401(k). Who are you going to invest in, the company that refuses to use out-sourcing and goes out of business or the one that is competitive in the market place and is able to give a return on investment to the shareholders. If in your retirement portfolio as a shareholder you get dividends on your investment considering how low CD rates are currently paying, this is a good thing and it would make you happy too.

8

We seem to be in a race to the bottom, driven by greed and sloth, so that products are becoming a joke, a real waste of money. Metal screws sold by some companies for use in wood are now so soft that the heads strip out at the least amount of resistance. Auto manufacturers concealing deadly flaws for years. Outrageous prices for basic internet service, at very low speeds. Shoes which are not repairable, and last only a few months, yet cost almost 100 dollars. Defense contractors ripping off the country.

Managing for the dividend means converting assets into cash, which is then given away for no benefit to the company. The shareholders are not going to improve the bottom line by continuing to hold your shares, they will keep it the same. So companies are in effect paying a ransom for their shares. As pride in workmanship declines, quality of products and services go down. People who try to take the time to do a good job are threatened will termination because they are taking too long.

Any time someone starts making a profit, a dozen other people pile on, trying to get in on the action, resulting in no one being able to make enough to survive. Greed is destroying our society, as we are programmed by our entertainment to want new products and services that we can live without. Television is an incredibly powerful tool for shaping the desires of the masses, and our behavior, as well. Show people acting a certain way on TV, and soon everyone is doing it. And what we are shown the most of is people consuming, using stuff, getting new things, validating their existence by spending money that they have not earned yet.

People have come to expect that they can receive wealth without expending any of their energy, skill, or time. Money for nothing. So what is this stuff worth that you can create out of thin air? Like when a collection agency buys bad debt, and tacks on several hundred dollars in fees, and then claims that their net worth has just increased. In America, having money owed to you increases your worth. Oh, and you can sell something which does not belong to you! You sell it short, and done properly, it can be very lucrative for a few people, while the rest of the market losses its ass.

Incredible amounts of money were made in the years leading up to 2007, so much so that people who never would of thought of taking out a second mortgage on their house were suddenly buying their third house, which they had no intention of living in. All of a sudden, houses lost a lot of value, because there were far more house than there were people who actually had the money to pay for them. All the wealth that had been created suddenly disappeared, evaporated. Did it really exist in the first place, or was it just numbers in computers? Real wealth does not evaporate over night, real wealth is bridges, roads, buildings, ships, trains, tangible things. That is where the name ‘real estate’ came from, because land was supposed to maintain its value. But the people who really lost where the ones who were not playing the market, flipping houses, and buying on the margin. They were the elderly couple who suddenly were getting pennies for their retirement investments, the couple who had ten years of equity in a home, only to discover that the house was worth less than the balance.

People got robbed, by the bankers, financial experts, and the CEOs. As long as we all agree to pretend that we are not broke, we can continue this Monopoly game forever. But the reality is that we lost, they have taken all of our money, so we can’t play anymore. Time for a new game!

9

You’re of course talking about companies like Apple, which sent jobs to China to make inferior goods just to increase dividends to shareholders?

Wait, two of those things didn’t happen.

10

Please describe this “new game” of which you speak.

(Fair warning: I’m pretty happy with the old one.)

11

One should never let reality’s not fitting your view get in the way of an irrational rant.

12

What, of any of this, is new? What are you saying* that has not been part of the human condition since the dawn of civlization?

To be clear, I am not happy about the fact that the masses get exploited, but have no idea what you would expect to change. Human communities organize this way, and come and go based on the dynamic between the Haves and Have Nots. So it goes.
*or, attempting to say. You type a lot.

13

This is the only answer even close to reality so far. Besides not tanking the company and doing such a bad job they get fired, management cares nothing about any but the very largest of shareholders.

14

How is life in the cabbage patch?
When is the last time the “owners” voted for the CEO as CEO? He gets appointed by the directors, true. When is the last time there was a real election for directors, outside of a takeover bid? A director running for office has as much opposition as Fidel Castro did. In one case, a very rare one, a director lost. The board, given that there was now an opening (no one could run against him) appointed him right back to the job.
Unless you are a billionaire or the head of a big pension, you as a small “owner” have zero voice in the company and how it runs.
Oh yeah, by new rules stockholders can vote against the pay package for senior management. But senior management doesn’t have to listen to them.
Democracy in action.

15

As has been mentioned, many companies which outsource don’t pay dividends.
Even if they are sitting on oodles of cash. You can understand outsourcing fine by looking at the pay incentives for top management.
Microsoft pays a dividend, and while it outsources it is not the kind of poorly paid factory workers you may be thinking of. The didn’t pay one for years, and got forced into it because of their stagnant stock price.

16

As I understand it, the practice of paying dividends did not begin until the 1950’s, although I have had difficulty finding any documentation on the history of stock dividends. American corporations were so profitable that they could not figure out what to do with the excess cash. For some reason, paying the employees a bonus never crossed their minds. Instead, they decided to reward the stockholders. This started a trend, which resulted in many companies being forced to pay a dividend if they wanted to sell stock.

I would much appreciate someone who actually knows the history of stock dividends describing their evolution and purpose.

Now, even if the company is barely breaking even, the stockholders still expect their dividend. Even if the company is losing money, people still scream for their dividend, as if it were a right. Profits are described as ‘earnings per share,’ or ‘losses per share.’

Markets have evolved into something far different than a buyer and a seller trading something of value. Manipulation of the market is becoming common, with flash traders making huge transactions in a fraction of a second. Time has become so important to these people that they pay top dollar for real estate in close physical proximity to the stock exchange’s computer locations. Futures markets allow people to buy and sell an abstract concept, what something will be worth in a X amount of time. All of these kinds of manipulations are allowing people to rack up big numbers in their bank accounts, without any tangible wealth being created.

But when the market crashes, these folks don’t seem to be hurt. Instead, it is the small time investors, the retirement fund members, the people who really need the money who get skinned. Then there are the folks who buy up a company with a good reputation, load it up with debt, and then walk away, after lining their pockets with millions of dollars. They could give a rat’s ass if they just put a bunch of people out of work, or if they have ruined the companies future prospects.

17

I cannot describe something which has not evolved yet, I can only say that the average person has gotten to the point where dropping out of the economy is starting to look appealing. Real unemployment figures are far too low, as there are many people who have given up looking for work. Other people are avoiding using money, instead bartering and trading with others of a similar persuasion. The economy is way out of balance, with huge amounts of debt being carried by governments and large corporations, debt which is rolled over again and again, so that the illusion of liquidity can be maintained. Banks no longer function by accepting money from people who want to save, and lending that money out to others. They are trading with each other using Collateralized Debt Obligations, Credit Default Swaps, and other arcane instruments of high finance. So called ‘dark pools’ of trading have been established, to avoid the scrutiny of regulators.

One of these days, we are likely to wake up and discover that the American dollar is worthless, because so many people have lost faith in it. Maybe bitcoin will be the next reserve currency. But the longer things go on the way that they are, the more likely it is that a major change will occur. The system is simply too far out of balance to keep going.

18

I thought this would be easy to find, but I see your problem - you get a history of individual stocks.

However I did find this page when looking for dividends for 1933 (date chosen at random)

I could see double digit divident yields, since they probably stayed more or less constant while the share price tanked. But this shows dividends were paid long before the 1950s, and probably long before this.

19

AFAIK, dividends were more prominent in the past. Robert Shiller extended the S&P 500 series (or S&P composite before the 1950s) back to… 1871. The data is available here: Online Data - Robert Shiller

The S&P composite (or rather Shiller’s extrapolation of it) had a price of 4.44 and a dividend of 26 cents in Jan 1871. That gives a yield of 5.9%. It was conventional wisdom for a while that stocks had to pay higher yields than short term bonds because the payments were riskier. Today the yield is about 2.0%.

20

Link already provided showing S&P 500 Dividend Yield going back to 1871 (5.49% in 1871 compared to recent 1.90%). It can be seen graphically as well. Dividend yields have been at historic lows ever since the late 1980s.

Increasingly companies reinvest money in growth and product development rather than distribute dividends. Why? Because growth is what makes shareholders (owners) happy, even more than dividend yield.