Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What They're REALLY Saying

By

Allow us to translate.

PrintPRINT

Part of getting investors to take risk, something both Wall Street and Washington must keep investors doing, is accomplished by getting investors to believe in ridiculous notions. Some examples...

"I like big dividends because you get paid to wait for something good to happen." - Joe Kernan, CNBC

Dividends are an accounting transfer of the wealth of a company. A company can choose to internalize (keep) those earnings and expand their operations, or if they find they don't need the capital, they can pay that wealth out to shareholders. Microsoft (MSFT) spent years trying to find something to do with their capital, but eventually just paid it out because there was no place where they felt they could invest it.

Dividends are not "extra" or "free" wealth above that which is generated by a company's operations. To illustrate, when a stock pays a dividend, the stock price opens at a price less that dividend. There is no net benefit to the investor.

"Company stock buybacks are good for the investor and good for the company." - Bob Pisani, CNBC

If that were the case, every company should buy-back every share but one. Stock buy-backs do reduce the float of the company and therefore will allow a company to report higher EPS given the same notional earnings, but they do not increase overall earnings. A stock merely changes the capitalization of its balance sheet, reducing equity capitalization and increasing leverage (debt to equity). It can be very good if the company expands its margins or very bad if it reduces them. It is merely a choice of how to capitilize a firm. In reality, buying back stock can reduce the ability to obtain cheap capital in the future.


Thoughts from fellow Minyans

Hi John -

The perceived wisdom on dividends and stock buybacks that we are hearing alot about in the popular financial media these days reminds me of the stock split phenomenon in the late 1990s. As I am sure you well recall, individual equities at the time would appreciate even on the rumour of a pending split announcement (on the logic that round lot trades would be affordable to a greater swath of investors following a split, which is obviously a very dubious proposition given the institutional dominance of the market). In all of these cases though, I would say that the reliability of the Pavlovian responses (prices up despite the fact the there is no underlying theoretical logic to the appreciation) natural engenders even greater re-inforcement of the phenomenon amongst the momentum crowd up until some point at which it doesn't have influence anymore (the tech crash pretty much resolved the stock split phenmomenon). May the inflection point be obvious to all of us...

I enjoy your posts.
Cheers,

Minyan PCB

PCB,

Investors rarely realize that CFO's of companies play many games with their capital base.

They conduct stock-buy backs only to re-dilute the company at higher prices by issuing convertible bonds via hedge funds (that short the stock).

Your example of stock splits is a good example. All these devices do is to serve to manipulate the psychology of investors.

-Succo

---------------------

Couldn't agree more with you--Splits, buy backs, dividends, convertible bonds, upgrades, downgrades,etc. are all tricks used to manipulate investors who never seem to learn and fall again and again into the trap.

Minyan Arun

Arun,

If you really track research one finds that it is extremely reactive and has almost no predictive value.

Analysts readily change their opinion when news comes out. And when ranking analysts, they get credit for an opinion change after news but before the stock begins trading: they change from a buy to a sell before the opening after news and when the stock opens up down big they are credited with having a sell rating.

-Succo

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE