The Dividend Question / The Daily Reckoning

verfasst von - ELLI -, 20.01.2003, 20:13

-->The Dividend Question

The Daily Reckoning

Paris, France

Monday, 20 January 2003

-----------------

*** Debt Bomb, Debt Bomb...I'm your Debt Bomb...

*** $31 trillion...and growing...trade gap heads for new
record...

*** Tech business don't look good...gold rises...closer to
capitulation...promoting religious harmony...and more!

-----------------

The stock market is a sideshow.

Center stage, gold, the dollar, debt, deflation and central
bankers are having a brawl.

"Debt Bomb," headlines this week's Barron's. Instead of
cheerleading for Wall Street, the financial press is
beginning to ask questions."Nothing to worry about? Or
prelude to disaster?" continues the headline.

We offer an answer: a disaster.

Debt is not necessarily a bad thing; a man who borrows at
5% in order to make an investment that pays 10% is no worse
off. But that is not what happened in America's consumer-
capitalist society. Individuals borrowed to increase their
consumption. And businesses borrowed in order to finance
acquisitions, stock buybacks, and mergers - usually at
absurd prices. Corporate chieftains were not interested in
the kind of capital investment that might produce real
profits over the long term; what they wanted was celebrity
status in the press, the kind of flashy results that would
impress the lumpeninvestoriat, and a higher stock price so
they could cash-out their options.

Deprived of adequate capital investment, business profits
have been declining - as a percentage of GDP - since the
'60s, with the most recent cyclical peak in '97. Imports
from overseas have been rising - with the trade gap headed
to a new record of 6% of GDP in 2003.

Not that consumption can't help build a strong economy;
American consumers have helped create one of the biggest
economic success stories in history - in China!

But now, American individuals and businesses face $31
trillion in debt - with no painless way of paying it.

That is the problem with a consumer economy. Consumers need
to be able to pay for what they buy. But as resources are
diverted from capital investment to consumption...consumers
have less real money to spend.

Of course you'll recall, dear reader, the remarkable speech
by Ben Bernanke on November 21st of last year, in which the
Fed governor offered to make our debts a little lighter by
inflating the currency and thus cheating the creditors. He
told the whole world that the planet's biggest debtor would
make sure the currency in which those debts were calibrated
continued to lose value - even if it meant resorting to the
'printing press.'

Not too surprising, then, that the holders of dollar assets
began to look for other places to keep their wealth. Since
the day of Bernanke's speech, the price of gold has risen
from $317 to $356. The euro has gone up too, from 99 cents
to $1.06. Don't be surprised to see these trends continue.

And now the latest from Eric. It is a holiday on Wall
Street today...but Eric is on the job:

-----------

Eric Fry, reporting from Wall Street...

- The Dow Jones Industrial Average slid 198 points last
week to 8,586, while the Nasdaq tumbled 4.9% to 1,376. The
major averages still cling to respectable gains for the
year, although the gains are somewhat less respectable than
they were one week ago.

- The Dow and the Nasdaq are both still ahead by 3% year-
to-date. But the buoyant optimism of the New Year is fading
fast. Back on January 1st, most investors embraced the
fantasy that stocks would move higher in 2003 because
corporate profits would recover, oil prices would moderate,
the dollar would regain its footing and the messy little
problem over in Iraq would quickly and antiseptically
resolve itself.

- But it looks like this dream scenario is running into a
hitch or two. Corporate profits, for one thing, are proving
to be very disappointing. The fourth quarter earnings
results from big guns like Intel, Microsoft and IBM weren't
terrible, but the same cannot be said of their earnings
growth prospects. Intel's CFO Andy Bryant said it best,"I
can't tell you when things will really start to pick up."

- The news that Intel plans to slash its capital-spending
budget for 2003 hammered tech stocks up and down the
technology food chain. The Philadelphia semiconductor index
lost more than 12% last week.

- While stocks swooned, the dollar suffered another of its
periodic fainting spells, falling to nearly $1.07 per euro
- its lowest level against the euro since October 1999.
Speeding the dollar's decline was the usual cast of
"enablers": slumping consumer confidence, frightening news
out of Iraq and - the coup de grace - a ballooning U.S.
trade imbalance.

- The nation's international deficit in goods and services
surged to $40.1 billion in November, from $35.2 billion in
October. After a while, all those billions start to add up,
and the sum of this equation is a half-trillion-dollar
trade annual deficit, which will weigh heavily on the
dollar's value.

-"For several years, King Dollar made for a one-way bet,"
writes Doug Noland."An unending flow of speculative
finance into U.S. securities (Recycling Bubble Dollars) for
years buoyed the U.S. dollar, despite rampant and
eventually self-defeating credit excess and ballooning
trade deficits...'Eventually' has arrived," Noland
proclaims."The great dollar speculative bubble is in the
process of bursting."

- Bad news for the dollar, however, is good news for gold.
Defying the"wisdom" of central bankers worldwide and the
confident clairvoyance of Wall Street's million-dollar
strategists, gold's persistent strength continues. The
yellow metal added $1.80 last week to $356.80 an ounce.

-"If this is a recovery," says Comstock Partners,"it is
certainly the most unusual one on record...All of the
negative factors we have been discussing in regard to the
economy, corporate earnings, excess valuation, investor
complacency and a vulnerable stock market are falling into
place and are about to become obvious to all...We are
getting ever closer to that final capitulation that drags
the market down to more reasonable values."

- Closer, perhaps, but still some distance away...

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Back in Paris...

*** Gold stocks fell 3.2% last week.

*** Consumer confidence has fallen again in January; it has
fallen in 8 of the last 12 months.

*** Industrial production dropped in 2002 - the first time
since '74-'75 that it has fallen two years in a row.

*** The Financial Times reports that the U.S. economy may
have been in recession in the last quarter.

***"It's good to see you here," said Père Marchand before
Sunday's service."This is unity Sunday, after all."

Père Marchand knows we are not true French papists. We have
been going to the little Catholic church in nearby Lathus
for...what, could it be 7 years already?...but we never
heard him express an opinion on Episcopalianism...until
Sunday.

"This is the day set aside by all churches - Catholic,
Protestant, and Orthodox alike - to pray for unity," Père
Marchand began his sermon.

"There is only one true church," he continued. Then, in his
effort to promote religious harmony, the priest described
how Episcopalians had gone astray:

"King Henry the 8th of England wanted to divorce his wife,
because she had borne him no child. Divorce was something
that was not permitted, so he placed his own interests and
his own desires ahead of the Christian community...ahead of
his duty as a Christian and ahead of the Church
itself...and had himself proclaimed as head of the new
catholic, with a small c, Church of England...

"And if you think about it, you realize that this was how
all these breakaway religions were formed - by people who
put their own beliefs and interests ahead of the one true
church proclaimed by Jesus Christ...."

The Daily Reckoning PRESENTS: Mr. Bush's proposed tax cut
on dividends has been given a lot of ink lately...but what
will the real fallout be? The Prudent Bear's David Tice
takes a look at...


THE DIVIDEND QUESTION
by David Tice

Investors introduced to stocks in the last half-decade have
asked some unusual questions in their quest for financial
success - questions like,"What's the target price?""Does
Henry like it?" and"Will Cisco buy it?" But given the
president's recent proposal to eliminate the tax on
dividends, investors may soon be asking the much more
sensible question,"What's the dividend yield?"

A renewed focus on dividends certainly would be a step in
the right direction. Thinking more about dividends means
thinking more about a company's long-term earning power and
less about"beating expectations."

There has never been a reason for investors to ignore
dividends. Dividends have accounted for more than 40% of
the annual return produced by stocks over the 1926-1997
period, according to Jeremy Siegel's"Stocks for the Long
Run". Dividends were a great help in the bear market years
of 1966 to 1979. Stock prices rose just 1.78%, but
dividends elevated the total return to 5.8% annually.
Dividends shrank in importance during the 1995-2000 bubble
period, as rising prices accounted for 19.23% of the 21.31%
annual return from the S&P 500.

Historically, dividends have enjoyed much more attention
than they do today. From 1802-1870, for example, Siegel
tells us that the total return on stocks hovered at about
7.1%, 6.4% of which was due to dividends. Over the period
from 1871 to 1925, the return on stocks remained virtually
unchanged, while the dividend component of the return fell
to 5.2%. From 1926-1997 period, when the return on stocks
shot up to 10.6%, the percentage due to dividends slid
further to 4.6%. Today, that figure is lower still: at
1.7%, the dividend yield on the S&P 500 remains near all-
time lows.

The renewed focus on dividends is also a reminder that
stocks aren't a compelling value even after falling for
three years running. Compare the current 1.7% S&P yield to
the 3% that the S&P 500 generally delivered in the '60s
before rising to 5% in the late '70s. It wasn't until the
'90s that yields dipped below 3% and stayed there. Bulls
have blamed such low yields on the double taxation of
dividends, but the president's proposal to remove the tax
would also remove that argument.

Nor can low interest rates explain away today's
historically low yields. The 1.7% yield competes with the
5% yield to maturity on long Treasuries. Yet Treasury
yields were lower (around 4.5%) and dividends higher (near
2.6%) near the 1966 stock market peak.

Certainly, eliminating the tax on dividends would be
positive for shareholders of dividend-paying companies.
Even tech investors have found such a prospect exciting,
making the case that more tech companies will set aside
cash for distributions. The stock of tech giant Oracle
jumped 6% the day the company hinted that it might pay a
dividend should the president's tax proposal become law.

The prospect of tech companies paying out dividends
presents an opportunity to value these companies as if
dividends were paid. Take tech giants Oracle and Microsoft,
for instance. Looking at consensus earnings estimates, we
can calculate what these stocks' hypothetical dividend
yields would be at, say, a 40% payout schedule - the ratio
the S&P generally delivers. For a share of Microsoft,
recently priced at $56.28 and expected to earn $2.16 per
share in the year ending June 2004, that yield would be
1.54%. Oracle's case is not much different: priced at
$12.99 and expected to earn $0.46 per share in the year
ending May 2004, the tech firm's dividend yield would
amount to only 1.42%.

Even at today's prices and using payout ratios that would
make a tech CFO's head spin, these giant tech stocks still
look expensive. Such valuations hardly reflect the much
higher dividend yields typically found at bear market
bottoms. And remember, these yields are based on earnings
estimates more than a year out, which assume a strong
recovery in the second half of '03. This conclusion - that
stocks aren't cheap - confirms a recent Wall Street Journal
analysis of the 66 tech stocks in the S&P 500 boasting free
cash flow. The Journal calculated that if those stocks paid
out half of their cash flow generated over the past year,
the group would yield a paltry 0.58%.

Valuation concerns aside, we have some questions of our own
about the bullish assumptions surrounding the new dividend
talk. First of all, do companies have the wherewithal to
deliver a dividend worth waiting for? Given the nature of
their business, most tech companies already have enormous
demands on their cash flow. Can these companies generate
enough cash to invest in plant and equipment while funding
research and development, and pay shareholders a
distribution as well?

Even if firms decide they can afford to pay worthwhile
dividends, it does not necessarily follow that they will.
Many companies, tech and non-tech alike, have aggressively
bought back stock in recent years. Management has argued
that seeking to realize"shareholder value" in this manner
makes more sense than paying (or increasing) a dividend.
However, much of the stock buyback activity in recent years
has been driven by the need to minimize dilution from stock
options. Will companies cut back on option excesses enough
to affect the payout ratios?

Today, payout ratios generally are at the low end of their
historic range. In theory, that means that companies have
ample room to ratchet up dividends and increase yields
going forward. Certainly we think an investor would be
better served with a higher dividend than another debt-
financed acquisition or share buyback program. We wonder,
however, if the payout ratio isn't understated given the
uncertainty of earnings today. If Standard & Poor's Core
Earnings concept (which results in lower earnings per share
than reported) is a more valid indicator of corporate
earning power, then the payout ratio is unusually high, not
unusually low. Companies may have less discretion on
payouts than advertised.

It's also possible that the new talk about dividends has
already been priced into the market. The S&P 500 rallied 2%
from the Friday before the president's announcement of his
tax proposal through the following Friday. Utility stocks
also gained 2% and REITs, which would lose some pizzazz
under the plan, lost 2%. But dividend-paying stocks in
general have outperformed handsomely for some time.
Dividend payers in the S&P 500 actually gained almost a
full percent from 2000 through 2002, while the rest of the
index fell 40%. If stocks have already discounted
elimination of the tax, we may not see much of a boost even
if Bush's tax proposal is passed.

But this last eventuality is far from a sure thing.
Opponents of removing the tax on dividends argue that
relatively few investors will benefit from the change. One
advocacy group claims that almost 40% of the benefits that
would go to elderly investors would flow to those making
more than $200,000 a year. Certainly mutual fund
shareholders would benefit, but the vast majority of those
investors own funds in tax-deferred accounts. Besides,
states are unlikely to follow suit by eliminating the
dividend tax as a source of revenue. According to the
National Governors Association, the lost income related to
dividends would amount to 8% of state budget deficits. The
point is simply, there are no guarantees that the exemption
will become law.


Regards,

David Tice,
for the Daily Reckoning

P.S. In general, however, the renewed focus on dividends is
positive. More dividends could mean fewer silly
acquisitions, more long-term planning, and fewer self-
serving stock buybacks. More emphasis on dividends and
earning power might mean less emphasis on creative
accounting...after all, there is no such thing as a pro-
forma dividend. Unfortunately, stock market valuations
based on today's dividend yields are yet another indication
that the broad market has yet to bottom. That means this
bear has further to run.

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gesamter Thread:

• The Dividend Question / The Daily Reckoning - - ELLI -, 20.01.2003, 20:13
  • Barron's auch mit Headline-Story"The Debt Bomb" - Minicooper, 20.01.2003, 21:27
    • Re: Barron's auch mit Headline-Story"The Debt Bomb" / Hier der Artikel... - -- ELLI --, 22.01.2003, 22:35
      • Re: Alan Greenspan: Theres no housing bubble (S.6.) ;-) - monopoly, 22.01.2003, 23:28