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Share dividends v reinvesting in the business?
Posted: 24 May 2018 08:37:11(UTC)

Joined: 29/01/2018(UTC)
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I'm reading Buffettology and one of the things Buffett is keen on is companies that reinvest profits into the business rather than pay a dividend.

So as I understand it, rather than the company paying you a 4% dividend, they put that money into the business and if you need the income you just draw 4%.

It seems to divide opinion on here, with some people liking dividends and others taking the "Buffett" view.

One piece that particularly stood out is that many companies apparently keep paying a dividend whilst taking on company debt, and whilst I'm very new to this that didn't feel entirely right.

Be interested to understand some individual perspectives.
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Dian on 25/05/2018(UTC)
Posted: 24 May 2018 09:29:52(UTC)

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In principle if u r a CEO looking after the best interests of your company, staff and shareholders:
- if the company has good growth opportunities it should re-invest for the future rather than pay a dividend now
- if the company is mature and doesn't need that much cash for R&D or growth it should pay out profits as divi
- don't pay dividends with borrowed cash

However, a company may want to keep it's shareholders on side through periods when it shouldn't pay a divi according to the above. Why? It may want to raise cash from them in the future for example.

Unfortunately, there are sometimes performance targets around share price and divi that push a CEO to act against what I would consider the companies best interests.

Personally, I am always reluctant to invest in companies that appear to be significantly out of line in following what I would see as best practice. Other than that I like a mix of more mature companies that can pay me a divi, and younger ones that are still in the growth phase. Picking good companies in the growth stage can be difficult, so I tend to hold these in ITs, but mature companies I hold the shares directly.
9 users thanked dyfed for this post.
Mr Helpful on 24/05/2018(UTC), Tim D on 24/05/2018(UTC), Aminatidi on 24/05/2018(UTC), Law Man on 24/05/2018(UTC), Alan Selwood on 24/05/2018(UTC), Tyrion Lannister on 24/05/2018(UTC), Dian on 25/05/2018(UTC), George C on 25/05/2018(UTC), Andrew Smith 259 on 28/05/2018(UTC)
Law Man
Posted: 24 May 2018 21:23:21(UTC)

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A good answer by Dyfed.

For myself, I am not greatly concerned to achieve returns via dividends for itself: a gain is a gain.

From the company's perspective, I like the discipline that modest dividends impose - it reduces the chance that the directors use the money for a takeover, when most takeovers can reduce value for the acquirer.

However, if the directors use the money for internal growth, it can be good.

As Dyfed says, avoid companies which borrow. To finance dividends. Check that free cash flow normally covers dividends.
5 users thanked Law Man for this post.
dyfed on 24/05/2018(UTC), Alan Selwood on 24/05/2018(UTC), Dian on 25/05/2018(UTC), Aminatidi on 25/05/2018(UTC), Andrew Smith 259 on 28/05/2018(UTC)
Posted: 25 May 2018 09:26:54(UTC)

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I followed few selected companies which had some terrible time in their day to day business in the past for a quite long period.They were hardly generating cash, debt were increasing. I also didn’t see any declaration of dividends either at the beginning. Gradually, they tried to improve their business.I also saw the improvement in the cash flow and found they were reducing debts as well. Later, they had a strong turnaround and wiped out debt completely from their balance sheets while making use of cash for internal growth. Finally, they started to declare regular dividends as well. Despite declaring dividend, still they are making use of money for internal growth.

Another company which I am still holding has become bad to worst. Management couldn’t generate cash internally like above example. In addition to borrowing, they issued more shares to fund their business. Directors also remunerate well despite having a weak business model. I doubt that they can declare any dividend. In a way declaring dividend without borrowing means company is doing well.

I have noticed some quality companies don’t pay dividend. Some pay dividend and increase or decrease on yearly basis depending on the earnings. There are dividend champions as well. Companies that pay dividends include Apple, Microsoft, Exxon Mobil and Wells Fargo. If I am right notable companies that historically have not paid dividends to shareholders include Facebook, Amazon, and Tesla. Another category is companies which paid dividend in the past have cut their dividends.

Despite not paying dividends, paying poor dividends or irregular dividend, share prices of those companies also have rocketed. In my view if a company cut dividend, then there is something to worry. There are strong companies which don’t pay dividend, pay poor or irregular dividend and build cash.

It is not a bad decision if company make use of cash for internal growth and to acquire quality business at a great price.
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Aminatidi on 25/05/2018(UTC)
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