Wednesday, October 7, 2009

Still a Bad Thing

Adjectives fail when the world of '1984' becomes a reality. Good is bad, truth is lies, up is down in the New Wall Street Order. Thus a formerly skeptical publication, Barron's, can print the following:

Kudos For Sunoco’s Div Cut

-->Posted by Bob O'Brien

Investors formerly reacted pessimistically to companies that cut their cash returns to shareholders. But shares of Sunoco (SUN) have gotten a bounce - not to mention some kudos from analysts - for cutting $70 million that it previously forwarded to those investors. The stock has risen 2% on the news.

Sunoco said that it would cut its dividend in half, a move that allows it to keep the $70 million total that had been going to shareholders. Yield on the stock gets trimmed from 4% to about 2%.

The owners of SUN have just been told that their income from owning this company, the operations of which they have no real control over, will be down by half from what they expected. This is identical to anyone from a day laborer picking vegetables to a software consultant working by the hour who suddenly learns that the grower or corporate client will now only pay half the prior rate--take it or leave it.

Yes, one can justify dividend cuts for unusual, special reasons. Ignoring the current banking problems, let us say that a smallish company such as a publicly owned community bank develops a truly unique software program that will require cash to introduce to the world. Perhaps shareholders would on average be better rewarded, given the cost of capital, to have the bank in essence transform itself into a software growth company using the cash flows that previously went to dividends to support the growth effort.

SUN has nothing like this. It simply has a business problem.

But of course the more a company retains its cash flows, the intrinsically more volatile the stock becomes, and thus the more valuable executive's stock options become (lacking the anchor of a stable dividend that makes the stock bond-like).

Wall Street cheers because more volatility means more trading.

The stock bull markets of the 1920s, 1950s and some other eras were powered by rising dividends. Powering stock price growth because of momentum upwards-- greed trumping fear-- leaves someone sucking nothing but air when and if that holder of the stock is the one standing on a trap door when the game of musical chairs ends.

Profitable companies that do not pay dividends, such as Amgen, should have all executives and directors receive no stock options. They should take part of their wages in stock ownership. Then let them look at dividend policy properly. Methinks they will suddenly change their tune.

Copyright (C) Long Lake LLC 2009

No comments:

Post a Comment