Is Bill Gross Right?

[adios]

Are dividends on stocks too low? Many companies have stock repurchase plans and the conventional wisdom is that stock repurchases are more tax efficient than paying dividends (at least that's what many corporate execs say). However, there is vast amount of money invested in tax deferred funds do collecting a dividend shouldn't be that much worse assuming the dividends are reinvested and compound tax deferred. Stock repurchases almost invariably show up as treasury stock in lieu of being retired. Companies can sell treasury stock at their discretion almost always so hopefully it's not being sold too cheap (to accomodate employee option excercises for instance) and that the extra cash shows up on the balance sheet at the right place. Anyway I think he's got a good point.

[scalf]

/forums/images/icons/shocked.gif good question tom, regarding dividends...i am from the camp that long term divs are not a factor...what is interesting; is how many people are real concerned now; as this bear /forums/images/icons/smirk.gif /forums/images/icons/grin.gif /forums/images/icons/confused.gif market makes us all into believers (vs atheists)....motley fool used to have a system where they bought the 3 highest yielding dow stocks...and it did very well for years...gl

[Wildbill]

This is the big debate of the day, but one thing that isn't really correct is that treasury stock that is retired in a buyback can't just be issued so easily. It still needs board approval. What is issued on a constant basis are stock option shares, but that is a whole different animal. As for dividends, well what would you expect from a bond guy???

I don't think dividends or buybacks are usually good ideas. What there should be is an occasional, non-recurring dividend of cash. Think about it, if you are a shareholder of company X, last thing you want them to do is buy back stock incessantly until they don't have cash to hold them over in bad times. Giving a dividend is dangerous because it is creates precedents you rather not have unless you are stable income like a utility. An occasional cash rebate would create a more stable holding of your stock, people that would like that cash when it is prudent, but if the company has needs for investing then they should use the money in the business. Only when a company isn't in need of cash for good projects they have a solid reason for investing in, then the company should return the excess cash. That is what pure investing theory is all about, use your cash plus anything you can raise (debt or stock) to invest in projects with positive NPV after considering cost of capital. What has gone wrong is that managers have too much incentive to buy back stock because it often raises the market price and then the execs can turn around and sell their own stock. I think my plan addresses almost every concern, its just managers play into the markets desires with almost "planned" earnings and this type of idea won't play to that. A manager with long-term interests in mind, not his own or those of the short term holders of the stock, would back this idea completely.