businesses that are inferior to what they already own and know, buying good ones at excessive prices, orbuying ones outside the area of their experience and expertise--far better to have paid dividends
.How much should companies pay out as dividends, as against what they keep for investment
has been apuzzle. Just how much do dividends really matter to shareholders?
liked to think about thethe
oretical possibility of a “frozen corporation,” one that by its charter was forbidden to pay dividends or
even merge or liquidate. If they could never, ever see any cash or other distribution from the company,why would ordinary investors want to own the shares? At what price would the shares trade? Fortunatelycompanies that can pay dividends eventually do.According to
, a company’s dividend policy is irrelevant even for shareholders who want a present
cash return. If the company does not pay dividends, investors are free to do what the shareholders of any
“frozen corporation” can do: sell some shares periodically in the open market. Depending on the taxstatus of the shareholder, these “homemade”
dividends may even be the preferred course.Since the famous MM thesis states that dividend policy is irrelevant, it tends to reinforce the preference of
corporate managers to keep dividends as low as possible. The MM theory puts a patina on management’s
self serving tendencies to hold on to the money, expand their business, buy and try a new one, or just feel
more secure with more cash in the drawer. If dividends are irrelevant for shareholders, they won’t pay
more for dividend-paying stocks. Thus, dividends are irrelevant for corporate managers, too. Howconvenient.Economists and finance people are thinking almost entirely about the impact of dividend policies on thecurrent market value of the company, not the impact on the business itself. The professors do not addressthe critical issue of
how a company should reinvest its cash flow
. The scholars assume that they know
the money will be invested, thus the only question left is the purely financial one of where the moneycomes from:1.
Retained earnings or2.
The market place if a dividend is paid.And, according to efficient market hypothesis (
) theorists, because the source of the money--a
company’s choice between debt and equity—
is said to be irrelevant in market terms
(CAPM or capitalasset pricing model)
, dividend policy is irrelevant too. In other words, the very issue that a businessperson sees as paramount
the choice between putting money back in the business or paying it toshareholders
they break up into two ostensibly unrelated ones. Absurd.
Coca-Cola once diversified (read
) into shrimp farming. Yes, shrimp farming. The venture failed because what connection is there
in the customers’ mind between drinking Coke and buying shrimp—
a branded good and an agricultural commodity? Former Coca-Cola Chief Marketing Officer Sergio Zyman explains why renovation of an existing brand is a better way to go. Associations can learn from the innovationerrors of the corporate world. Coke, for instance, once got into the shrimp farming business. No, I'm not making this up. Coca-Cola had fantasticcore competencies in purchasing, distribution, sales, logistics, and global operational capabilities. Where it all fell apart was that Coke neverthought about why customers would buy shrimp from them in the first place. Shrimp farming was not the company's core essence. Consumerssimply made no connection between shrimp and Coke. What are you doing that makes members raise an eye or give a quizzical look when (or if)they learn about your association's involvement?