04-28-2015, 01:45 PM
(04-28-2015, 01:10 PM)Dividend Watcher Wrote: So wouldn't a manager want to know that he has to pay the dividend regardless if the business is going up or down and factor that into their pricing calculations?
The managers job is to make as much profit as possible. Whether that cash is going to dividends, share buybacks, future investments or is getting flushed down the toilet, this doesn't change the pricing model. The point of making the pricing calculations is to achieve a good balance of sales and margin, where that money goes afterwards doesn't matter.
But on to the real subject:
I do think the European way is much more logical, they make the profit that they can and out of that they throw X amount to shareholders based on the state the company is in. If they have more debt they might pay some of that instead of distributing the money etc. Or they might pay more dividends than usual because they simply can't find new investment opportunities right now. The American way is ofcourse lovely for us DGI investors but is it really healthy for the company? There are a lot of companies out there who are paying more than their EPS or more than their FCF in dividends, simply because they are expected to keep or raise the dividend year after year.
Take a look at PG for example. They had a bad year due to the strong dollar among other things. They are in the process of selling brands and restructuring their operations, I'm guessing a lot of that incoming cash will be used to pay down debt. Their payout ratio is starting to be high. Looking at this logically, was there ANY other reason to raise the dividend *right now* apart from keeping up with their dividend aristocrat status?
The only problem I have with the European model is the fact that many companies choose to wait until the end of the year before paying a dividend. I'm not sure how problematic it would be to use a similar model where dividends are within, say 40% and 60% of EPS but still pay out quarterly?
And yes it's a bit unstable which does make it slightly harder for us planning on one day living more or less only on dividend income. But as long as the company is making a stable profit the dividend will not change dramatically so the only thing needed (together with proper diversification ofcourse!) is a bit of caution.