Forum Archive Index - June 2000

["Oliver Shapleski" <oliver.shapleski@vuw.ac.nz>]

Moral of the story: All the numbers in the world mean absolutely nothing if
the fundamental analysis is flawed.  I wouldn't call financial theory
rhetoric in a hurry.

Oliver

> Nice rhetoric, but how about a worked example for you. Borrow $100K.  at
8%.
> Invest in company for 1 year and analyse the results
>
> Case 1 : No Change in share price
>
> Company pays 2% dividend, Sell shares Pay back bank $108K, Net result $6K
> loss.
> Company pays 8% dividend. At end of year, sell shares, pay back bank $108K
> Nett result no gain or loss
> Company pays 10% dividend, sell shares, etc make $2K
>
> Case 2 : Share price increases at 1.5 x inflation rate (a rough long term
> average here) - say 5% this year
>
> 10% dividend => $115K - $108K = $7K gain
> 8% dividend => $113K - $108K = $5K gain
> 2% dividend => $107K - $108K = $1K loss
>
> Case 3 : Share price drops 50% -  like many NZ shares in the past 6-12
> months
>
> $48K - $40K losses

> Synopsis : In a static market as a rational investor you have to expect a
> dividend return from a company at least equal to the cost of money to buy
> the shares.  In a declining market don't even bother to get out of bed.
> Assuming the market will rise at a rate well above the long term average
is
> pure speculation and is clearly not justified at present.
>
> Jeremy


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