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The Alchemist (10/24/2007)
By Al Thomas

Dividends are Dying

Back in Dinosaur Days, well maybe not that long ago, but before 9/11 and before the 1987 crash and even before that a good stock was considered one that was selling for 6 or 10 times earnings and paid a dividend of 5% or more. There are few, if any, of those any more.

Today a P/E ratio of 20 and even out to infinity is acceptable with no dividends and maybe none in sight for years to come.

Instead of paying a dividend (which is not a dividend as I will explain) companies today are buying back their own stock. This does gives the stockholder a larger share of ownership and more participation as the company grows.

Is a stock buyback by the company better than paying a dividend?

When a stockholder receives a so-called dividend he is really receiving a distribution of company capital and not a true dividend. The best example is the $3.00 "dividend" by Microsoft. At that time the stock was selling for $30 when it was declared. The next day the stock was priced at $27.00. If the investor had bought the stock the day before he would have received the full $3.00 "dividend". A bond dividend would have paid 1/365 of the year's earnings. Furthermore the investor must pay income tax on the "dividend".

If the company had used the same amount of money to buy back its own shares the stockholders percentage of ownership would have increased and he would not have been required to pay the IRS.

Recently there has been a huge bruha-ha about seeking out stocks that pay dividends. Who is kidding who?

Douglas Skinner, an accounting prof at the U of Chicago did a study on stock buybacks and found the amount of buybacks now exceeds the amount of declared dividends.

Currently the S&P500 shows dividends of about 2.1%. If there were no buybacks and this money was used for "dividends" you might extrapolate S&P "dividends" to be 4.2%. OK, that's a stretch, but you can see where this is headed.

Is it possible that "dividends" may slowly disappear in favor of buybacks? The amount attributed to dividends in the SP500 is really not an accurate measure of what the stockholder is receiving. As investors begin to understand their true nature it might happen.

Companies like the buybacks. They are free to make the purchases when they have extra cash and are not straight-jacketed into paying a "dividend" when they may be short of cash. Many companies have been known to borrow money to pay those fake dividends because investors have been brainwashed into believing they are getting something extra. They aren't. Just because dividends are disappearing, dieing, does not mean investors are receiving less for their investment. Buybacks are making up the difference.

Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter at www.mutualfundmagic.com to discover why he's the man that Wall Street does not want you to know.

Copyright 2007 All rights reserved.

 

 

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