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Investment Analysis Clubs / Dividend Growth Investing
|Subject: Re: The Case for Dividends||Date: 2/10/2013 7:14 AM|
|Author: StuyvesantGrad70||Number: 7825 of 9914|
Forget trying to find the next big thing. Find a proven company with pricing power that generates a lot of cash. Then follow the cash. There are several possibilities:
1. The company generates a lot of cash and reinvests its cash back in its own business. This is OK as long as they can generate a lot of cash on the cash they reinvest in themselves. The cash is spent wisely and the business grows. This is the early growth phase of a great company. This can be great for shareholders, as long as the growth lasts, and if the company doesn't try to grow too fast.
2. The company generates a lot of cash but does not reinvest its cash in its own business. It cannot generate a lot of cash on the cash if it reinvests in itself. So it lets the cash build up on the balance sheet. This describes Apple today. The growth is great for shareholders, as long as it lasts, but the cash on the balance sheet is doing anything for them.
3. The company generates a lot of cash but does not reinvest its cash in its own business. It cannot generate a lot of cash on the cash if it reinvests in itself. Instead of letting cash build up on the balance sheet, it returns the cash to shareholders in buybacks and dividends. This describes the Philip Morris approach. This is great for shareholders, that is the point of the article. If the shareholder reinvests his dividends, his returns will increase, but that's not the point.
3 The company generates a lot of cash but does not reinvest its cash in its own business. Instead of letting cash build up on the balance sheet it reinvests its cash in other businesses, but it does a lousy job of it. Peter Lynch calls this de-worsifying. Microsoft generates a lot of cash but blows some of it by de-worsifying in companies like Skype. Many corporate leaders don't deploy cash wisely, or they just deploy cash to build up their own empires and their salaries. This is not good for the shareholders.
4. The company reinvests a lot of its cash in other businesses and does a great job of it. Berkshire Hathaway invests its cash wisely in other good businesses. This is great for shareholders, no dividends or stock buybacks needed. However, most corporate leaders cannot allocate capital like Warren Buffett and Charlie Munger.
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