Yesterday a friend sent me a link to this article posted on the wonderful site fivethirtyeight.com. The article makes a case that corporate America is enriching shareholders at the expense of the economy – in fact, that’s the title of the article. I’d encourage to go read the article – it’s definitely interesting.
After I read it, I had a couple of thoughts and I figured I would try to hash them out here. I certainly don’t claim to have thought this through completely and the original article was written by someone who is way, way smarter than I am, so take these thoughts with a (huge) grain of salt.
First, let’s understand the main, bottom-line point of the article:
- Large US companies are paying out more cash than ever before via dividends and stock buyback programs. This is leaving less cash for other activities such as investment and growing the operations of the company. The author sees this as ending badly because of the insatiable desire of investors for higher and higher cash payouts.
What are my immediate thoughts on reading this article?
First, I’m surprised that the author does not differentiate between the many different classes of dividend paying companies. There are lots and lots and lots of companies out there that pay dividends at a foolishly high rate, or at a rate which makes the dividend unsustainable at its current level.
Secondly, I’m surprised that the author hardly mentions earnings in his article. For many companies, dividend increases/decreases fall somewhat in line with changes in earnings.
Thirdly, I’m a little bit fuzzy on what the author proposes as a solution. Or if we even need a “solution”. I mean, if the corporation has a legal obligation to guard the fiduciary interest of its shareholders, does this activity not fall under that umbrella?
Mostly I’m surprised that companies such as Coca-Cola or Johnson & Johnson get lumped in with dividend payers that are not very smart. When I invest in JNJ, I do so knowing that the company pays out only approximately half of its earning in dividends. That leaves a lot of room for either future dividend increases or, ideally, investment of that excess cash in order to further the profitability of the firm. And when JNJ posted a net income of approximately $13.8 billion (with a B!) for 2013, that’s a lot of cash for both dividends and investments. True, EPS growth for JNJ has not grown at an ideal rate over the last few years, but I think in the future that will change and that’s why as investors, we look at the payout ratio – how much of earnings are being paid out in dividends. Is that sustainable? Does it leave room for investing and growing the company, etc.?
Anyway, I thought this was an interesting article but it didn’t really convince me on the main points and I’m a little bit confused about why the author felt it was necessary to write it. I’d be interested in reading a longer piece on this topic with some more research and numbers included.
Did anyone else out there see this article?