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JUNE 22, 2002
STOCK MARKET WOES
By CHET CURRIER
NEW YORK - Much of the misery afflicting the stock market can be laid at the door of a simple misunderstanding.
If people in positions of power only had a better grasp of the concept of corporate dividends, we might not be in the fix that plagues us today. Sounds far-fetched, you say? Give me a couple of minutes to state my case.
Dividends are a central element of stock investing. A share of stock represents nothing more nor less than fractional ownership bearing a proportional right to the profits a company earns.
Dividends - cold, tangible cash - are the way these profits are distributed.
Another number that commands investors' attention, earnings per share, is really only a stand-in for future dividends. Though a business may find a thousand ways to dress up its earnings, just try to fake a dividend.
Here's where the trouble started. The people known in Washington dispatches as 'Congressional tax writers' decreed that every penny of dividends would constitute taxable income for the recipient, even though it came from earnings that had been taxed already as it passed through the corporation.
Not just taxable income, but 'ordinary' taxable income ineligible for the gentler treatment accorded to long- term capital gains from stock price appreciation. This naturally prompted investors to emphasise gains in stock prices and downplay dividends.
Reported quarterly earnings, a much fuzzier quantity, became the guidepost. Soon enough, a cult of steady growth in those quarterly numbers increased both the temptation and the opportunity to bend, then break the rules.
In the late 1990s, some investors began looking beyond earnings altogether to New Age indicators such as hits on a dot.com company's website. Hits are not taxed even once.
Corporate bigwigs and professional investors fell in step. Where once a company might have paid out half to two-thirds of its earnings as dividends, by 2000, the payout ratio had dwindled to less than one-third.
The more tenuous the link grew, the more excesses of speculation and creative accounting could occur. The more excesses, the more in- evitable and ugly a subsequent bear market became.
'Dividend yields, 3 to 5 per cent for many decades, collap- sed to a derisory 1.2 per cent,' Mr Ralph Wanger, chief investment officer at mutual fund managers Liberty Wanger Asset Management, wrote in the latest quarterly report of Liberty Acorn Funds.
Institutional investors came to see dividends as an admission by directors and executives that they lacked the know-how to find better uses for the money.
Nobody suggests that dividends should become investors' sole concern to the utter exclusion of capital gains. The market serves the world economy well, if imperfectly, by raising and lowering stock prices as each business's potential to generate future dividends improves or diminishes.
In a newly sceptical age, though, the 1990s idea that dividends are for sissies is due for serious reconsideration.
Mr Wanger says corporate boards may be in no hurry to go back to dividends on their own initiative. Their interest might revive quickly, however, if investors speak up.
'It will happen,' he wrote, 'when company management has a conference call to announce quarterly earnings and an analyst for a big institution replies, 'Well, Charlie, that was a great quarter and I would love to buy your stock for our fund. Unfortunately, I can't. Our fund has a rule - we can only buy stocks that pay dividends'.' -- Bloomberg News Copyright @ 2002 Singapore Press Holdings. All rights reserved. |