First off, I get that cash is a finite resource. If a company has extra cash, there are a lot of reasons why to not use it to pay dividends – expansion plans, or capital improvements, or to provide a cushion for an expected downturn, etc.
But Marco Rubio recently said, while talking about the new tax plan, that some companies (because of sitting on large amounts of cash), would be “forced” to pay some of it out in the form of dividends. (I can get a cite if must be when I’m back on my regular computer.)
The term “forced” seems to mean that this is something they wouldn’t want to do. Why not? Assuming they don’t need the cash for other purposes what reasons might they have for not wanting to pay dividends?
I inherited some stock from my Grandpa. I did a little research, and they hadn’t paid a (common stock) dividend in 15 years. Price was pretty stagnant, too. I sold it and paid off my house.
Sum-bitch’s started paying dividends shortly after!
Seriously, though. Not a single regret in dumping that stuff. The money I saved on mortgage interest was well worth it.
Forced as in the owner wants some of the surplus of the company it owns. That’s what a shareholder is, a owner of the company. And a owner with a say of how things are run.
Now if the company is flush with cash it would be hard to deny that the owners get paid, unless there is a good reason (paying off debt, capital improvements etc. but if it is business as usual they will want their cut, vote in a new board of directors that will get them their fare share. That is the force, either the current board will vote for the dividend or they will be voted out and a new board elected to do that.
Once you pay a dividend you are stuck paying it forever - or face a decline in your stock value. So you may want to be conservative and not force yourself to pay them in lean years.
Also, when tech companies started not paying dividends became standard, since dividend stocks like AT&T were considered stodgy. Some have started, thanks to their hoards of cash, but it is not expected like it was in the old days.
There are a number of companies that are already sitting on historic piles of cash. Since they aren’t investing it now, giving them more just increases the size of the pile. Rubio’s suggesting that will drive stock buybacks and dividends, not expansion. The owners are going to want something.
I’m pretty sure Rubio moved higher on the list of Trump’s 3 am twitter rant targets when he gave that interview.
Perhaps this makes me ignorant, but I still don’t understand why would a company want to pay a dividend?
I understand the shareholders technically own the company, but that dividend money could be reinvested in the company instead. Why give it to the shareholders as dividends rather than reinvest it to grow the stock value?
According to this article, a big reason companies may be hoarding cash is they are expecting some kind of technological paradigm shift.
If so, I don’t see why giving them more cash will do anything but shore up their reserves for when this happens.
The other two reasons listed are fear of a downturn and wanting to avoid paying taxes. Maybe the tax law will help with the second, but for the first it’ll just lead to more hoarding.
But he himself tends to invest in stocks that pay dividends - he is or has been invested in Coca Cola and Wells Fargo and IBM - steady dividend paying stocks. He likes investments that give him cash to invest.
Continuing hoarding is certainly an option too. The hoarding that is mostly about not paying taxes is stuff that’s currently offshore in non-US subsidiaries. Just because it’s cheaper to bring it back now doesn’t mean they will since they don’t really have a need to.
Rubio also doesn’t discuss that the majority of American business aren’t C corporations subject to corporate income taxes, even if most of the largest are. They are the “pass through” companies who’s owners pay personal income tax on profits. Individual tax rate cuts might have some impact there.
Rubio’s major concern remains. C Corps are hoarding cash instead of investing it in expansion. Cutting corporate rates may not produce the growth the administration is touting.
As one of those endangered centrist Republicans, I like him taking the shot publicly. He’s more subtly dissented from Trump on foreign policy like early support for the new Russia sanctions. Even though he voted for the bill, he’s challenging not just administration rhetoric but also the newer party orthodoxy in the era of the Norquist pledge. He managed to get in some Child Tax Credit expansion for his vote too. It’s a start.
Unless its going to grow the share value by at least as much as the dividend would have been, the shareholders are being stiffed. They are bound to notice, sooner or later.
Essentially, a company reinvesting distributable profits in itself is essentially saying to the shareholders “the best possible use, shareholders, that you can make of these profits is to reinvest them in this company, so we’re going to do that for you”. Shareholders who think that the best use would be, e.g., to reinvest them in another company (because they want to diversify, because they think the other company’s prospects are better) won’t be impressed.
Cash is an asset, so if the company pays it out as a dividend, the share price drops immediately by the amount of the dividend.
Suppose two companies are both trading at $50, and have both generated $3 income from operations that’s sitting in the bank.
Company A pays out the $3 in dividends, so its stock price drops to $47.
Company B keeps the $3, so its stock price stays at $50.
Alice owns 100 shares of A.
Before the dividend, she owned 100 shares @50 worth $5,000.
Her 100 shares @47 are now worth $4,700, and she has $300 cash.
Bob owns 100 shares of B that are worth $5,000.
He needs $300 cash to go to Vegas with Alice, but company B doesn’t pay a dividend. Bob can just sell 6 of his shares @50 for $300.
Bob’s 94 shares @50 are worth $4,700, exactly the same as the value of Alice’s 100 shares, and he too has $300 cash.
Bob and Alice are in exactly the same position, whether or not the company actually pays out the cash as a dividend.
Traditionally, stock investors were divided into two groups, long term and short term, aka buy and forget and buy and get rid of. The long term group wanted the security of regularly payments, usually at better rates than bank accounts gave. The speculators looked for quick profit from sudden changes, whether positive or negative. Only a very rare stock kept going up and up forever. (“I bought Xerox at 8” is one of the great lies of the 20th century., which worked great until it didn’t)
The mentality was a natural result of the growth of industry in the U.S. after the Civil War. Most corporations were local, in the sense that the headquarters and most of the factories and workers were all concentrated in one place, even if they had offices and dealings around the world. In return, they supported their cities and were good corporate citizens. Companies having lots of small shareholders who received regular dividends knew they would therefore tend to support the company in whatever it wanted to do.
That changed when Milton Friedman announced that corporations have only one responsibility: to make the stock price go up to benefit the stockholders, which in reality meant a) those short-term speculators and b) corporate officials who received huge stock benefits. Both a) and b) leaped all over this precept. Virtually every company today is driven by keeping the stock price high and rising. Few can do so naturally. Most resort to buying other companies to achieve artificial growth and/or cut employment levels to lower costs. Even long-term necessities like r&d are often skimped because they don’t offer immediate returns.
People have been screaming about this in all the decades since, but they aren’t the ones who make the money from the current system and don’t get listened to. Among the many, many abuses that come out of this short-sighted system is the hording of huge stockpiles of cash, much of it stashed offshore. This is so strange that economists can’t really explain it. A good article comes up with two possible answers, which could both be right. Part of it comes from executives protecting their asses; part of it from the huge uncertainty in where the economy is going to go.
For the rest of us, spending that money would help the current economy grow to everybody’s benefit. IOW, *now *they start thinking long-term. :smack:
While your example is correct, UDS’s post is right as well. Your example assumes that the company has uninvested cash sitting in a bank account, which is valued 1:1 in the company’s market cap. However, if that cash was actually invested in the operations of the company, its value would be multiples of that, essentially the net present value of the future cash flows from that investment.
The point is that these corporate tax cuts are basically just trickle down economics all over again. A leap of faith that has no history of success. Companies are already flush with cash and have access to very cheap debt. They simply don’t have enough to invest in, or at least nothing that will return them more than the risk-adjusted cost of their capital. If there isn’t adequate demand for goods and services, investments are not worth the risk that they carry. And you need a wealthy population to be able to want things and spend on them. Cash sitting in company bank accounts serves no purpose. Shareholders can basically earn the same in their own bank accounts as the company can.
I should clarify that this comment assumes an efficient flow of capital, which is not always the case, and is precisely why some companies hoard cash. Companies without easy access to capital will sometimes hold cash in order to pounce quickly on investment opportunities or simply to have it available to other options, tax or legal surprises, insurance, etc.
This is not correct because the value of a company (and hence share price), rationally-speaking, is not the asset value of the company. The value of a company, again from a purely rational standpoint, is the present value of all future net cash flows of the company. If the present value of all your future earnings is less than the current asset value of your company, you have a bad business and should just liquidate your company and go home.
If I can take the company’s $3 for myself as a dividend, invest it somewhere else, and get a decent rate of return, that’s worth more to me than if I’m stuck leaving the $3 within the company at some lesser rate of return on cash. So I’m willing to pay a higher share price for the right to get ahold of that $3 myself.
Of course, the reality is that the value is whatever the heck I can sell the stock for, plus any dividends I may accrue between the time I buy and sell the stock. All discounted to present value.
