Stocks and Dividends

Dividend or no dividend is not really the question. The question is whether management is intelligently reinvesting the profits from the business. Once they've earned a dollar in income, they basically have one of three things they can do with it:
1. Reinvest in the same or buy a different business
2. Repurchase stock
3. Pay a dividend

There is no right answer. Paying the dividend is only right if the shareholder ends up with more value than the result of the other two options. BRK has done very well with option 1, while WPO has done very well with option 2. Unfortunately many companies have opted for buybacks when their stocks were insanely overvalued, or have done so only to offset insane amounts of stock option grants (like DELL).

Essentially, if they are not able to reinvest competently, they should buy back shares. However, if their stock is richly valued they should simply issue a dividend.

The 90's were a dismal era where these fundamentals were largely ignored, perhaps distorted by excessive stock option grants. It is fairly obvious that if a CEO has a large number of options he is strongly motivated to avoid paying dividends. To get back to intelligent reinvestment decisions we really have to eliminate the tax penalty on dividends, and the distortions of option compensations.

Jaeger