Just back from two weeks in Aussie, where this issue is currently getting a
lot of press also - especially in the Australian Financial Times.
Actually Ben, I think you were close to the answer when you said "I'm more
arguing that in NZ we have gone to an extreme with dividends - and some
companies should stop giving them and instead focus on reinvesting profits and
focusing on long-term growth and expansion."
The only way it will change is when the 'growth' companies themselves here
start 'having the confidence' to act like growth companies - that is, it
is a management issue. I suspect [IMHO] that the root of this problem lies
in the lack of financial management theory skills probably to be found in the
management of many NZSE mid and small cap companies. Note I have no scientific
evidence to back this up, it is simply an opinion - too many lawyers,
accountants, and entrepreneur's with no academic backgrounds on the boards and
not enough people with finance backgrounds?
----- Original Message -----
Sent: 3 August 2000 2:33 PM
Subject: Re: [sharechat] Big picture
issues
Great comments from Brian and others. It's good to get some
substantial discussion going on this issue.
I'd like to add that, unfortunately, we seem to be in a "Catch-22"
situation with dividends in NZ at the moment. On the one hand, companies
with good growth potential should, as Brian points out below, not be paying
dividends.
But, on the other hand, some have argued that it is the dividends that NZ
companies pay that is actually keeping the NZ market alive. Stop paying
dividends, it has been said, and NZers will pull their money out of the
market, dragging down the NZSE from its current flat-line state.
I think Warner hit the nail on the head when he said education is the key
- NZers have to stop constantly worrying about dividend yields and start
focusing on growth prospects for a change!
Don't get me wrong, I'm not against dividends full stop and it's
excellent to have some companies on the NZSE that have good yields. I'm
more arguing that in NZ we have gone to an extreme with dividends - and some
companies should stop giving them and instead focus on reinvesting profits and
focusing on long-term growth and expansion.
For those of you that missed the article, read this:
I'd be interested in hearing other comments on this Catch-22
situation. How are we going to get out of it?
Best Regards,
Benjamin Dutton
----- Original Message -----
Sent: Thursday, August 03, 2000 12:41
AM
Subject: [sharechat] Big picture
issues
For those of you who may follow the Motley
Fool sites you will have seen this post already. Sorry. However I'm
interested in feedback/discussion re. NZ investors very high reliance on
dividend payments.
IMHO I believe NZ investors preoccupation with dividend yield is one of
the most detrimental effects on the growth of the NZ market. In fact to be
slightly contentious I will go so far as to say it has a significant effect
on the growth of the NZ economy as a whole.
Warren Buffett believes
that a company should retain all it's earnings if it can employ them at a
rate of return that is better than an investor could get by taking delivery
of those earnings via a dividend.
Surely if a company is consistently
year after year realizing a tax paid ROE of >15% it must be much more
attractive for the managers to reinvest that earning to the continued growth
of the shareholders equity thereby in effect achieving a compounding
interest of in excess of 15% if at the same time the company's Net Margin is
also consistently increasing.
I argue that if a company has excellent
management, a strong track record of growth and room for further profitable
growth, PLEASE DON'T PAY ME A DIVIDEND.
Granted I own PFI for it's
dividend but simply because we want a portion of our portfolio invested in
the property sector and investing in a property company in our situation is
more convenient and profitable than owning rental property.
Good
growth companies shouldn't feel a need to pay dividends thereby stifling
growth.
The second point I'd like to make is in regard to the '87
crash. So much has been written about it and yet I recently saw a chart
which tracked the S&P500 for the past 50 years. The October 1987 was a
mere blip on the screen.
Even the conservative old Consumers
Institute will tell you that the stock market has consistently, over a long
period of time outperformed property, fixed interest and cash. They advise
that when you are saving for retirement 70% of your portfolio should be in
shares and that even when you are retired you should still have up to 40% of
your portfolio in shares.
So why are investors still totally
preoccupied with the "crashes" or the potential for crash. I have to wonder
how well individual companies and the NZ Stock Exchange market the benefits
of long term equity investments.
I believe that more should be
spoken about the huge difference between "trading" or "playing the market"
verses "long term buy and hold" and "investing from a business
perspective"
What's my point? I don't know, I just needed to get it
off my chest and hopefully get some feedback.
Cheers,
Brian
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