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Investment Analysis Clubs / Dividend Growth Investing
|Subject: Re: The Case for Dividends||Date: 2/9/2013 6:23 PM|
|Author: kelbon||Number: 7821 of 9549|
The best of the best hails not from a hot, rapidly growing industry, but instead from a field that was actually surrendering customers the entire time
A company that is losing customers can only prosper if they are able to charge their remaining customers more for their products or services, and, to an extent that more than compensates for the revenue lost from a shrinking customer base, and then some. Philip Morris was, and is, able to do this because they sell an addictive product that customers are prepared to keep paying more for because that is an easier option for them than trying to kick their habit.
Philip Morris, was, and still is to an extent, the exception to the rule. Most businesses that are losing customers, even if they are paying a dividend and buying some shares back, are likely in decline. Companies must have deep and wide moats to be able to continually raise prices for their goods or services in the face of a stagnant, or shrinking, customer base. They are few and far between. The caveat being that because a company pays dividends and buys back shares doesn't necessarily mean that you would be wise to buy their shares.
Warren Buffett's largest stock purchase for Berkshire Hathaway in a very long time was IBM. In its present incarnation, it has some of the same characteristics as Philip Morris. They pay a dividend; though not a large one, but more importantly they are committed to, and have been, buying back a considerable number of their own shares. They have a deep and wide moat because of the service contracts that their customers are committed to because they have little or no option.
Back to Philip Morris: What was the secret? Credit a one-two punch of high dividends and profitable, moat-protected growth.
In the article the author doesn't mention if the great returns for Philip Morris's shareholders was contingent on them reinvesting the dividend. Presumably this is the case. If an investor receives dividends from a company that is returning the lion's share of their earning to investors as dividends, and spends them rather than reinvests them, then he's (obviously) not going to see the kind of potential capital appreciation that those who reinvest dividends see. It's worth considering that it's not so much that a company