[Am-info] Dividends

[Dave Solomon]

John J. Urbaniak wrote:

>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.
>John J. Urbaniak wrote:
>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!"

As you mention below, Micrsoft can give out shares of stock, if the
stockholders approve.  What is the probability of the stockholders
approving a proposal that company management recommends?  My guess
is that it is better than 99.9 percent.

>
>>  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.

I'm just trying to look at things in general terms.  I admit that
I haven't crunched any hard, specific numbers.

>  >
>>
>>  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

I don't see why not.  Where in the law, where in SEC regulations, where in
the company charter does it say that they can't?  If they can't, how about
giving options at a strike price of $1, rather than $45?

In any case, I see your point about dividends taking money out of the
company's assets, and giving the company little in return.  I wouldn't
say _nothing_ in return -- dividends would probably enhance demand for
the stock and thus raise the stock price a little bit; but probably not
enough to outweigh the cost of the dividends.

Still, for Microsoft to pay dividends, the company management has to
decide to do so; or they have to be forced to do so by the stockholders.
Management won't do it voluntarily, if they think it's detrimental to
the company.  That leaves the possibility of stockholders demanding
the payout of dividends.

Hmmm, imagine that ... stockholders looting the company, rather than
management looting the company!  Wow, I might begin to like this idea.