{"id":1272,"date":"2010-07-27T06:08:35","date_gmt":"2010-07-27T10:08:35","guid":{"rendered":"http:\/\/www.credittrends.com\/blog\/?p=1272"},"modified":"2010-08-13T18:15:51","modified_gmt":"2010-08-13T22:15:51","slug":"why-it-would-be-unwise-for-firms-to-boost-dividends","status":"publish","type":"post","link":"https:\/\/www.credittrends.com\/blog\/2010\/07\/27\/why-it-would-be-unwise-for-firms-to-boost-dividends\/","title":{"rendered":"Why It Would Be Unwise For Firms to Boost Dividends"},"content":{"rendered":"

While a dividend increase will often provide a stock \u201cpop\u201d , 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\u00a0entire\u00a0company\u00a0and pay a huge dividend (payback of capital)? <\/strong>Obviously, BP should not consider dividend resumption until its liabilities are confidently estimated and its maximum growth is unimpaired resulting from a dividend.<\/span><\/em><\/p>\n

READ FULL ARTICLE<\/span><\/a><\/span><\/span><\/em><\/p>\n

<\/p>\n

I cite the following:<\/p>\n

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    \n
  1. As seen in the chart above, for the S&P 500 Index, dividends are currently being paid at near 20% of operating cash flows, which is the historical norm.<\/li>\n
  2. Operating cash flows have been exaggerated due to corporate executives maintaining a tight lid on expenses and strict\u00a0management of\u00a0the balance sheet, especially working capital items. \u00a0To the extent such tightening is lifted in favor of growth opportunities, it would not be difficult to increase the dividend without borrowing. Expansion also requires additional working capital and other items necessitating cash, including additional labor (and benefits), and other support (including, legal, I.T.)<\/li>\n
  3. If because of an \u201ceveryone else is doing it\u201d attitude, dividends are increased with borrowings (lifting debt ratios), cost of capital will rise and stocks will become a riskier investment, reflected in continued wide swings in securities prices. Coming out of a severe credit crises, cash outflows that do not increase prospective cash flows are not advised.<\/li>\n
  4. Firms should currently seriously consider (if financial flexibility exists), with free cash flow valuation multiples suppressed, making acquisitions within their core competency. Such value-adding acquisitions will add to return on invested capital and enhance shareholder value (presuming a comfortable safety margin exists in their analysis regarding the acquired assets or capital expenditures over their weighted average cost of capital).<\/li>\n
  5. Dividends do nothing to enhance long-term shareholder value. If anything, dividends send a signal management is bankrupt in finding better uses for cash. And there are currently many excellent outlets for cash which would increase a firm\u2019s spread between its return on invested capital (ROIC) and cost of capital. What\u2019s Berkshire Hathaway\u2019s (BRK-A<\/a>) dividend yield again? Why? Because Buffet knows the real way to enhance shareholder value, and it\u2019s not via payment of a \u00a0dividend.<\/li>\n
  6. It’s also about time investors recognized the road to real wealth is through long-term capital gains, unless of\u00a0course\u00a0you operate a high frequency hedge fund, in which case \u00a0you can afford to buy a major league baseball team. \u00a0The evidence is clear: If firms give away their flexibility, they deny upside performance and increase downside risk.<\/li>\n<\/ol>\n

    Disclosure: No positions<\/p>\n

    Kenneth S. Hackel<\/a>, C.F.A.
    \nPresident
    \n    CT Capital LLC<\/a><\/p>\n

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    <\/a><\/p>\n

    \"\"

    For additional information and extensive analysis on free cash flow, cost of capital and return on invested capital, pre-order- \u201cSecurity Valuation and Risk Analysis<\/a>\u201d out this fall from McGraw-Hill.<\/p>\n

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    While a dividend increase will often provide a stock \u201cpop\u201d , 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 […]<\/p>\n

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