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Author: Oglove Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 103  
Subject: Common Share Dividend Policy Date: 2/14/2005 8:46 PM
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Some Motley Fool readers have critiqued my QUALITY OF EARNINGS book having to do with the chapter on dividends and, “my own view, based upon empirical evidence, clearly is that, all things being equal, a corporation is better off in the long run paying minimal or no dividends.”

Upon reflection, I would now agree that the above statement is too harsh regarding corporate dividend policy. However, the investor must be on guard if he has invested in a dividend-paying stock that has a very high debt level to shareholders' equity or is incurring additional debt in order to pay dividends.

One classic example of a corporation that never paid a dividend was Teledyne, headed by Dr. Henry E. Singleton. Between 1972 and 1984, Singleton's stock repurchase policy, in lieu of paying common share dividends, resulted in the corporation's outstanding shares being reduced from 82 million to only 12 million. During this same time span, the price of Teledyne shares soared from a low of $6 to a high of $338.

Another great illustration of a corporation reducing its dividend substantially and using excess cash flow to repurchase common shares is IBM. When Lou Gerstner came on board at IBM in 1993, the company was paying $1.21 a share in dividends per year. Within a few years, Gerstner slashed the dividend to only 40¢ annually. During Gerstner's reign at IBM between 1993 and 2002, the corporation's shares outstanding decreased to 1,695 million from 2,285 million. Even now, IBM's yearly dividend is only 78¢.

Berkshire Hathaway has never paid a common share dividend. This is because Warren Buffett believes he can reinvest all of his excess cash flow more profitably than a shareholder could with the dividends he would receive from Berkshire. It should be noted that since 1973, Berkshire Hathaway has risen value from $35 a share to over $80,000 today.

IT'S IMPORTANT TO NOTE THAT DIVIDENDS CONSTITUE A HIGH PERCENTAGE OF TOTAL STOCK MARKET RETURN. BETWEEN 1926 AND 2003, DIVIDENDS ACCOUNTED FOR OVER 30% OF AN INVESTING GAINS.

Thornton Oglove

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