What is a company that does not pay dividends (unless it is obvious)?

Hello everyone,

Before you start, don’t misunderstand me as cynical. Rather, think of it as exploring me while learning more about this business world.

Over the past few weeks, I’ve been trying to find out more about why businesses are configured to pay lucrative employee benefits rather than paying dividends.

It makes perfect sense to reinvest in a business, so you can refrain from paying dividends. (This can be 3-5-10 years). And I am happy as an investor in this business model.

However, it can be important to consider the “employee” benefits system as a veil that enriches the top of the pyramid (actually a considerable genius).
Directors and other executives use their own chartered superfunds for 40% pre-tax benefits, with stock options and a variety of other benefits going on for years.

Another thing I’ve noticed is that when companies lend a market for loans, they tend to pay the return of the loan to the bank rather than trying to raise money solely through the investor program.

Again, banks will be cut in a relatively short period of time, except that the millions of dollars raised by “retail” investors will sell their holdings at a price higher than the price they bought. I don’t get anything. Bank-created ROI (considering current cash rates and creative use of bank credits).

Does anyone know of a business that once did not pay dividends (for growth purposes) but chose to start paying dividends?
Or is it the standard practice to continue the business without paying dividends (like the old man’s Trilionea Buffet does in his business)? )

Best regards,

pie

Hello Pythagoras,

Basically you asked two important questions, and the answers are based on the two most basic things that investors in a company’s stock need to understand.

Your first question is basically “Why doesn’t it make sense not to pay dividends in the long run?”

The answer is based on simple math. For example, if a company has a growing business that can invest new capital and make a 25% profit, holding a profit of $ 1 per share will result in a profit of $ 0.25 per share. Will increase. If the company is trading at a PE ratio of 10 (Price Earnings Ratio), increasing earnings by $ 0.25 will increase the stock price by $ 2.50, so in that situation holding 100% of earnings per dollar would not be possible. It makes perfect sense. Avoiding dividends will raise the stock price by $ 2.50.

An extreme example of this is Berkshire Hathaway, which canceled dividends over 50 years ago and had a stock price of $ 6 at the time, but today’s stock price is $ 347,815 per share (more than $ 340,000 per share). It was possible because they did not pay dividends and were very good at reinvesting their retained earnings.

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The second question is why companies borrow more shares from their shareholders rather than raise them.

The answer goes back to the same idea I explained above. Use the same company described above to earn a 25% return on your invested money, for example a 25% return on equity.

Let’s say you have a capital of $ 10 per share and you make 25% of that capital.
Earnings per share will be $ 2.50 and the share price will be approximately $ 25 based on pe10.

Now, let’s say you can go to a bank, borrow money at an interest rate of 4%, and invest those funds at 25% by expanding your business. Yes, we are paying banks, but existing shareholders are making a lot of money on their own. Pay 4% to the bank and the remaining 21% will be in the interests of shareholders.

Therefore, these bank loans will change the situation considerably,

So instead of a company that looks like this-
A stock of $ 10 per share, that is, earning 25% of that stock = a profit of $ 2.50 per share, and its share price is about $ 25 based on 10 pe.

The company may look like this-
$ 10 per share, or earn 25% of that share = $ 2.50 in earnings
+
Borrowing $ 5 per share, or 21% (after interest) earnings = $ 1.05 earnings
= =
A $ 3.55 earnings with a PE of 10 means a stock price of $ 35.50.

Therefore, borrowing money from a bank allowed the company to grow and raise its share price from $ 25 to $ 35.50 without the need for shareholders to invest additional cash to fund growth.

Companies may choose to use debt to fund growth as a way to grow the company, and increase earnings per share without reducing dividends, so shareholders hopefully all go well with capital gains. You can get both dividends, or some companies even borrow money, so you can return shares to shareholders. For example, you can pay more dividends or buy back shares when you replace shareholders’ funds on your balance sheet with debt.

Disney has done this for years and has taken on debt to fund a share buyback of about $ 10 billion annually. For every $ 10 billion of shares they bought back, they spent about $ 5 billion and $ 5 billion in debt from their earnings. It makes sense that they were low and their inventory was low.