[Am-info] Dividends

[Dave Solomon]

What will Gates & company do?  Most of what they pay out in dividends,
they will be able to pay for by savings on other expenses, such as
salaries and bonuses.  That is my prediction.  In fact, they may even
come out ahead.

This is why I believe this.  Just as water tends to flow through a
path of least resistance, spending of money tends to flow through a
path of least taxation.  As an employee of Microsoft, wouldn't you
rather be compensated by $100,000 of tax free dividends than by
$125,000 of taxable salary and bonuses?  So by hiring you with a
signing bonus of, say, 100,000 shares of Microsoft stock, paying
dividends at the rate of $1 a year per share, both you and Microsoft
would come out ahead.  This is admittedly a simplistic analysis;
still, I am certain that this will be a trend: corporations will
more and more use dividend-paying stock as a currency, so that
the recipients save on taxes.  (Note how corporations presently
do a similar trick with stock options, and that they get the
advantage there of not having to treat stock options as an expense
on their balance sheets.)

Gates' salary is already very low, compared to other American CEOs.
He gets compensated, currently, mostly by realizing capital gains
on (i.e., selling) some of his millions of shares of Microsoft stock.
(Or is it billions of shares now?)  Hmm, capital gains are already
taxed at a lower rate than salary income.  Coincidence?  I don't
think so.  I'm sure Bill Gates would not mind getting his share of
Microsoft's income in the form of tax free dividends rather than in
(what, 20 some percent taxable?) capital gains, and I'm sure
Microsoft stockholders will not mind, either, since it would cost
the company less to provide the same net after-tax compensation.

Companies that are cash-poor could come out ahead, too.  All they
have to do is succeed in setting up and promoting dividend re-investment
plans (DRIPs).  I'll make another prediction: DRIPs will replace
stock options in a lot of compensation packages.  Especially in
Bill Gates' and Steve Ballmer's cases; they may well end up with
more dividend money than they want to take out of Microsoft in most
quarters.

I don't think this is a no-win situation for Microsoft.

Editorial comment:  Who is the loser here?  I think it is the
United States of America -- all of us.

-- Dave Solomon

Bush -- isn't that another version of the contraction BS?

At 11:43 AM -0500 1/6/03, John J. Urbaniak wrote:
>It seems that a significant component of the Bush economic stimulus plan
>will involve the removal of taxation from corporate dividends.
>
>I watch the financial and political programs on CNBC, CNN, Fox and
>others.
>
>Talking heads on these problems are *expecting* Microsoft to declare and
>pay a significant stockholder dividend - they mention the enormous hoard
>of cash (~$40 billion) which Microsoft is now sitting on.
>
>Now I think the following numbers are accurate - if not, you can make
>appropriate corrections.
>
>There are about 7 billion shares of MSFT outstanding.
>
>MSFT currently sells for about $54 per share.
>
>A $1.00 per share dividend would yield slightly less than 2% of the $54
>share price.  But such a dividend would cost Microsoft about 7 billion
>dollars.  If they do this for a few years, their $40 billion begins to
>dwindle.  Remember, dividends do nothing for the paying company - they
>only generate goodwill for the investors.
>
>The higher MSFT stock price rises, the higher dividend would be
>*expected* by investors and pundits, because dividends are evaluated in
>terms of the price of the stock.
>
>What will Gates & company do?
>
>Will they declare a reasonable 2 - 4 % dividend to reward their
>investors?  7 billion lost to Microsoft treasury for every $1.00 of
>dividend paid per year?
>
>Will they forego a dividend and risk the wrath of the analysts,
>investors, pundits and politicians who are expecting it?
>
>Will they declare a pitifully small dividend and again risk the wrath of
>those who keep looking at that $40 billion?
>
>This is a no-win situation for MS, I think.
>
>But I think it makes for an interesting discussion.
>
>John