View Full Version : Peter Schiff, You are a Genious...AGAIN
jclay2
02-29-2008, 10:33 PM
Ok, so lately I have been thinking about investing. One of the questions that has popped into my head is why the heck do companies buy back stock instead of paying out dividends. Right now, a majority of companies in the united states stoc k market would rather put a large share of their earnings into stock buy backs to satisfy the incredibly expensive compensation they pay their executives. To me, stock buy backs are absolutely rediculous. When I invest, I invest for the future dividends, not stock buy backs. Then I came across this statement by peter Schiff.
As a long term investor you’ve got to look at the fundamentals of the company, you’ve got to look at the dividend yields. That’s how you make your return. What a stock is, the way you value a stock, it’s the present value of its future dividend streams. Most people today who are buying stocks don’t even look at dividends and most companies aren’t pay them, which is one of the reasons that they can get away with faking their earnings. Because if you don’t have to pay a dividend, you can pretend you’re making money. The reason that Enron was able to pretend they had earnings is because they didn’t have to write a check. You can’t send out a pro-forma dividends check, “this is the money that we could have paid you out in dividends, but don’t cash it”. So the market is still extremely overvalued and don’t believe the propaganda, and that’s what it is. When you’re listening to an analyst on a lot of these popular financial shows, the mainstream Wall Street firms, you’re not getting investment advice, you’re getting propaganda. These firms are trying to sell you stocks. Their real clients, their banking clients, are trying get rid of stocks. And they hire these Wall Streets firms to peddle their merchandise, and they want to get as much as they can from these overvalued stocks. So you’re not getting unbiased advice.
So aparently, I am not the only one who thinks that dividends are the only way to go. Another interesting thing is that one of harvards "best business ideas" of the year for 2007 was to use company earnings on expensive aquisitions instead of rewarding investors with dividends. What a joke. How has wall street duped everyone? Well, once again the genious peter schiff is ahead of the game.
angelatc
02-29-2008, 10:44 PM
I see what he's saying, and I'm hardly an expert, but a small cap start up wold be better off reinvesting their cash into their business.
If you're talking blue chips, he's definitely got a point, but young growth companies shouldn't be paying out dividends.
billyjoeallen
02-29-2008, 10:50 PM
Peter Sciff is the new E.F HUtton. I hang on his every word. I would have made a fortune if I had acted on his advice.
forsmant
03-01-2008, 12:04 AM
MBIA, the bond insurer, stopped paying a divided just recently and the stock went up. I don't understand that at all. Wouldn't that mean that they are struggling to stay afloat on their bad insurance underwriting?
If they are not sharing the wealth, they have no wealth.
AceNZ
03-01-2008, 12:10 AM
I understand what Schiff is saying, but I don't 100% agree.
I prefer Warren Buffett's reasoning:
1. If a company can re-invest its profits at a higher rate of return than I can, then it should keep whatever it can productively use and grow the business (this is measured by ROE).
2. If a company has excess cash and if it's stock is undervalued by the market, then it should buy back its stock. This increases the value of the remaining shares, and allows investors to profit through capital gains, which aren't taxable until the stock is sold.
3. If the company's stock is fully-valued, then dividends are an appropriate alternative.
As an owner of the company (stockholder), I would much prefer a stock buyback to a dividend, because the buyback increases the value of my shares without tax impact, thereby allowing my investment to grow on a tax-deferred basis -- basically allowing the money I would have had to pay out in taxes to continue to work for me.
However, I agree with Schiff that for a company with fully-valued stock, paying out their income as dividends does help keep them honest. A company with lots of cash, a low ROE, no stock buybacks and no dividends is a huge red flag.
jclay2
03-01-2008, 12:45 PM
1. If a company can re-invest its profits at a higher rate of return than I can, then it should keep whatever it can productively use and grow the business (this is measured by ROE).
2. If a company has excess cash and if it's stock is undervalued by the market, then it should buy back its stock. This increases the value of the remaining shares, and allows investors to profit through capital gains, which aren't taxable until the stock is sold.
Yes, obviously I am not criticizing new inovative growth companies who should be investing for future growth. What I am criticizing is the majority of companies who buy back stock. If you are an investor, you would expect your money to be made by dividends and the increase of the share price from a higher dividend. Just take a look at companies like microsoft. At some times, microsoft would be haning on to nearly 40 billion dollars of cash. What incentive do I have to buy a stock if that company mostly rewards its shareholders with stock buy backs? Really nothing.
icon124
03-01-2008, 01:14 PM
Let me explain the mainstream reason why people don't like when companies pay dividends...I'm a finance major and this is what has been fed to us..
It's basically admitting failure. They're paying dividends because they couldn't find an investment that would give the stockholders a bigger return in the share price. AND Dividends don't have a return on investment, once you pay them they are gone for good.
Yeah, pretty sad huh? That's what they teach us in class. I understand small cap companies re-investing to continue the growth of their firms, but once you become blue chip you don't need all of those risky investments (or diversification - conglomerate, the stupid thing about huge companies diversifying is investors already do that...why would they want the company they invested in for diversification in the first place to diversify even more LOL) so they should have dividend payments. I think there should be some kind of law that makes companies pay dividends once that company hits certain financial criteria. Of course that would never happen because business sleeps with Government and vise versa.
I understand what Schiff is saying, but I don't 100% agree.
I prefer Warren Buffett's reasoning:
1. If a company can re-invest its profits at a higher rate of return than I can, then it should keep whatever it can productively use and grow the business (this is measured by ROE).
2. If a company has excess cash and if it's stock is undervalued by the market, then it should buy back its stock. This increases the value of the remaining shares, and allows investors to profit through capital gains, which aren't taxable until the stock is sold.
3. If the company's stock is fully-valued, then dividends are an appropriate alternative.
I understand Buffett for the most part when it comes to dividend payments (BTW did you take that from Essays from Warren Buffet?) BUT I have a problem with the second point of undervalued companies. This can happen, but we have enough sophisticated investors that won't let it happen for to long, and especially not long enough for a company to buy back its own stocks. I believe that we have efficient markets that go off course for a little while, but then get adjusted by the sophisticated investors like Buffett. So I don't see how a company can justify buying back stock because their company is undervalued. I just don't see companies staying undervalued to long, but that is also assuming sophisticated investors stay in the market to begin with.
davver
03-01-2008, 01:38 PM
Companies don't pay dividends because it doesn't maximize CEO compensation.
If you have stock options you want the nominal value of the stock to increase. Nominal values go down when you pay out dividends.
Also, dividends aren't sexy. Nobody looks at a chart and goes wow, your price is flat but you paid a fat dividend. As a CEO you look sexy when you start a bunch of new projects and are "doing things". Hopefully one of them strikes gold and the stock price skyrockets and you look awesome and your stock options are worth a lot.
AceNZ
03-01-2008, 01:57 PM
Just take a look at companies like microsoft. At some times, microsoft would be haning on to nearly 40 billion dollars of cash. What incentive do I have to buy a stock if that company mostly rewards its shareholders with stock buy backs? Really nothing.
Microsoft paid out the largest dividend in history just a few years ago -- something like $30B.
The incentive you have to buy stock in a company that rewards its shareholders with stock buy backs is that those buybacks will increase the price of the stock, because there will then each remaining share on the market will represent a larger fraction of ownership in the company. Plus, the gains on the stock will be (can be) taxed at lower capital gains rates, as opposed to dividends, which are taxed at normal income rates -- and those taxes are only incurred when you sell the stock, rather than immediately.
Saying you don't care about stock buybacks is the same as saying that you don't care if a company issues new shares and dilutes existing stockholders (stock "inflation") -- it's ignoring the fact that the number of shares a company has on the market has a direct impact on the value of each share.
BUT I have a problem with the second point of undervalued companies. This can happen, but we have enough sophisticated investors that won't let it happen for to long, and especially not long enough for a company to buy back its own stocks. I believe that we have efficient markets that go off course for a little while, but then get adjusted by the sophisticated investors like Buffett. So I don't see how a company can justify buying back stock because their company is undervalued. I just don't see companies staying undervalued to long, but that is also assuming sophisticated investors stay in the market to begin with.
History clearly shows that the stock market is not very efficient -- that's the whole premise behind "value investing" and is the foundation of the success of world-class investors like Buffett. Or think about boom / bust / bubble cycles; stocks go from being expensive to cheap to insanely overpriced. It's not rocket science.
Highland
03-01-2008, 02:30 PM
We have a RP economic ad coming out with Peter Schiff next week! look for it on
http://www.highlandmediaworks.com/ronpaulad
icon124
03-01-2008, 02:47 PM
History clearly shows that the stock market is not very efficient -- that's the whole premise behind "value investing" and is the foundation of the success of world-class investors like Buffett. Or think about boom / bust / bubble cycles; stocks go from being expensive to cheap to insanely overpriced. It's not rocket science.
I understand that, but what I'm saying is the imagine a straight horizontal line representing market efficiency...we do divert from that line...and that's how you get value investing, BUT for the most part that doesn't last to long and we get pretty close to that straight line again...mainly when the market is full of sophisticated investors.
torchbearer
03-01-2008, 02:49 PM
We have a RP economic ad coming out with Peter Schiff next week! look for it on
http://www.highlandmediaworks.com/ronpaulad
+999999999999
expatinireland
03-01-2008, 02:55 PM
I can not quote any source but from personal observation over the years I think you will find that companies in which the management are significant stakeholders will start paying dividends when the company has reached a certain stage in its development.
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