[Am-info] Dividends

[John J. Urbaniak]

Dave Solomon wrote:

> 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.

Microsoft can't just "give" employees 100,000 shares of stock.  At the
current price of about $55, that would be $5,500,000 - some "hiring bonus!"



> 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.)

I don't think you've analyzed the math involved.

>
>
> 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.

Gates benefits, no doubt.  That's because he already has a bunch of stock.
And MS stockholders would benefit as well.  But the company still has to pay
about $7 billion per year in cold cash for which they (the company) receive
absolutely nothing.

>
>
> 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.

For Gates and Ballmer, yes.  But the company still loses a bunch of money.
What do they get in return for that $7 billion they have to spend every year?

And to predict that DRIPs will replace stock options is a real stretch.  A
company can't just create stock out of thin air.  It has to be approved by
the stockholders.  Stockholders would naturally resist such a creation
because it would dilute their own holdings.

Options are a different kind of animal.

A company can grant an option, say a "call" to buy MSFT at $45.  If the
current price is $55, this call option is worth $10, but only if the holder
exercises the option.

At our hypothetical $1 dividend, an employee would have to hold 10 shares of
stock to receive the same amount of money for 1 year.  As I have stated
above, the 10 shares would be worth $550, which would have to be accounted
for.  MS can't just "give" employees shares of stock like they give options
now.

John