Why It Would Be Unwise For Firms to Boost Dividends

July 27th, 2010 by hackel Leave a reply »

While a dividend increase will often provide a stock “pop” , I believe it would be unwise to expect, and for an enterprise to pay out, substantially increased dividends at this time. For example, I couldn’t disagree more with BP’s statement today of $39 billion in possible asset sales and a commensurate look at reinstating the dividend. Why not liquidate the entire company and pay a huge dividend (payback of capital)? Obviously, BP should not consider dividend resumption until its liabilities are confidently estimated and its maximum growth is unimpaired resulting from a dividend.

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3 comments

  1. A.C. Cameron says:

    Interesting take on dividends. Essentially you’re saying dividends are bad; and would agree in some cases. But isn’t the whole pt. of owning a share of a co. to participate in both growth and profit. While it’s obvious that the top people in these companies get paid outsized salary/bonus wouldn’t it make sense to pay the owners too?

    While trading is obviously hugely profitable for hedge funds etc, you are not really a share holder. IF the co. grows i.e. stock up, then it’s a good co. but you can’t stay with it and share in true profits unless you sell. Seems backwards to me.

  2. Steve Scroggin says:

    What you say is true, but incomplete. A bird in the hand may be worth two in the bush, especially if you have the slightest doubts about the bush’s accountants.

    As an investor I seek a company that can earn better returns than I can and so make better use of cash flow than I can, but many companies have proven their ability to long report the appearance of success, without its substance.

  3. William Wood says:

    Dividends DO matter. Long run rates of return of dividend funds in Canada have been higher than pure equity funds. See PH&N and BMO.