Subtext: We don't know where to put the $$ at this critical transition point (Ballmer leaving). Rather than figuring it out, we're just going to give the money to shareholders -- that's the safe way so that they can't question our fiduciary responsibility.
All tech companies should do this once they reach a certain maturity. Eventually every company should return capital to the markets, otherwise the markets would just be one big ponzi scheme...
I happen to agree with you re:dividends. I've been a big proponent of MSFT's dividend for years. But I'm not sure that increasing it (or share buybacks) right now is a good idea.
Microsoft is struggling to figure out their future direction in the new mobile-centric world. They've now released multiple products that are (IMO) flops. Throwing cash back to investors might be good for the short term, but its all for naught if the company is irrelevant in 10 years.
Not necessarily a good comparison, since the shares can be traded. You can step in very late and still have all the chances to get very rich, which is hardly possible with a Ponzi scheme.
A ponzi scheme is defined by the fact that the only profit to be made comes from people who buy in after you. If companies don't return capital to the markets (through dividends or buybacks), then it absolutely fits the definition of ponzi scheme.
The proper cycle of a publicly traded company is that it trades equity for capital, uses said capital to invest in itself, then returns capital when it reaches a certain maturity. Anything else is a scam.
The difference between a company and a Ponzi scheme is that the company is actually creating some value. It is converting capital into resources, priorities and processes that generate more capital than it gets. At some point it can't convert capital into more capital, so it's better to pay a dividend -- but even if it never does this, it's not a Ponzi scheme if value is being created.
A Ponzi scheme never generates more cash than it gets -- it only simulates profits.
But shares are traded because there's an assumption that the company will distribute earnings (as dividends or buybacks) eventually. Otherwise they would have little (voting rights?) or no value.
Dividends are far from the only way you can realize value as a buy-and-hold investor with infinite patience. For example, the company might be acquired in a cash-for-stock deal. (I don't hold my Microsoft shares in the hopes that someday Google or Apple will just swallow them for old time's sake, but hey, stranger things will happen as time goes to infinity.)
This means that even if your stock of choice never distributes dividends, it is essentially a non-expiring call option on participation in an eventual sale.
Ultimately, if a company does not do that at all (in its lifetime) then it does not provide any benefit to it's shareholders except the share price gains - and for a company which starts from 0 and ends at 0, share price gains are essentially zero sum.
So what you are arguing is that a company should not provide a positive payout to its shareholders. Well, I beg to disagree.
Ultimately, if a company does not do that at all (in its lifetime) then it does not provide any benefit to it's shareholders except the share price gains - and for a company which starts from 0 and ends at 0, share price gains are essentially zero sum.
Corporations rarely either start with a stock price of $0/share, and only end at $0/share when they end insolvent, which, while many end that, isn't the way all end.
Obviously I was oversimplifying. However, my claim still holds: if companies were not paying dividends at all, then there'd be no stockmarket and no investing.
However, my claim still holds: if companies were not paying dividends at all, then there'd be no stockmarket and no investing.
Sure there would. The main theoretical support of the value of stock as a marketable asset is the claim on the corporations assets at dissolution and the hope that when the corporation is dissolved, your share will be worth more than when you bought it; dividends are just a means of effecting a partial dissolution.
If corporations never paid dividends, were never acquired for cash, and never otherwise dissolved except through insolvency which returned nothing to shareholders, then your argument with regard to the stock market might hold some weight (there'd still be a potential for a stock market if stock existed, but without an effective claim on assets, its hard to see how it would never suffice for raising capital in the first place.)
But there'd still be investing, even in businesses; it'd just all take the form of bonds.
Comments
Subtext: We don't know where to put the $$ at this critical transition point (Ballmer leaving). Rather than figuring it out, we're just going to give the money to shareholders -- that's the safe way so that they can't question our fiduciary responsibility.
All tech companies should do this once they reach a certain maturity. Eventually every company should return capital to the markets, otherwise the markets would just be one big ponzi scheme...
I happen to agree with you re:dividends. I've been a big proponent of MSFT's dividend for years. But I'm not sure that increasing it (or share buybacks) right now is a good idea.
Microsoft is struggling to figure out their future direction in the new mobile-centric world. They've now released multiple products that are (IMO) flops. Throwing cash back to investors might be good for the short term, but its all for naught if the company is irrelevant in 10 years.
Not necessarily a good comparison, since the shares can be traded. You can step in very late and still have all the chances to get very rich, which is hardly possible with a Ponzi scheme.
A ponzi scheme is defined by the fact that the only profit to be made comes from people who buy in after you. If companies don't return capital to the markets (through dividends or buybacks), then it absolutely fits the definition of ponzi scheme.
The proper cycle of a publicly traded company is that it trades equity for capital, uses said capital to invest in itself, then returns capital when it reaches a certain maturity. Anything else is a scam.
Or the company is bought out for cash, as in the case of Dell, or bought by another company for cash and/or shares.
No company goes public with the intention of being bought out.
And the entity that's buying the company does so with the intention of distributing the profits (to themselves).
The difference between a company and a Ponzi scheme is that the company is actually creating some value. It is converting capital into resources, priorities and processes that generate more capital than it gets. At some point it can't convert capital into more capital, so it's better to pay a dividend -- but even if it never does this, it's not a Ponzi scheme if value is being created.
A Ponzi scheme never generates more cash than it gets -- it only simulates profits.
But shares are traded because there's an assumption that the company will distribute earnings (as dividends or buybacks) eventually. Otherwise they would have little (voting rights?) or no value.
Dividends are far from the only way you can realize value as a buy-and-hold investor with infinite patience. For example, the company might be acquired in a cash-for-stock deal. (I don't hold my Microsoft shares in the hopes that someday Google or Apple will just swallow them for old time's sake, but hey, stranger things will happen as time goes to infinity.)
This means that even if your stock of choice never distributes dividends, it is essentially a non-expiring call option on participation in an eventual sale.
Getting into a Ponzi scheme late is okay, so long as you still get out early (before it becomes apparent that it is a Ponzi scheme).
Ultimately, if a company does not do that at all (in its lifetime) then it does not provide any benefit to it's shareholders except the share price gains - and for a company which starts from 0 and ends at 0, share price gains are essentially zero sum. So what you are arguing is that a company should not provide a positive payout to its shareholders. Well, I beg to disagree.
Corporations rarely either start with a stock price of $0/share, and only end at $0/share when they end insolvent, which, while many end that, isn't the way all end.
Obviously I was oversimplifying. However, my claim still holds: if companies were not paying dividends at all, then there'd be no stockmarket and no investing.
Sure there would. The main theoretical support of the value of stock as a marketable asset is the claim on the corporations assets at dissolution and the hope that when the corporation is dissolved, your share will be worth more than when you bought it; dividends are just a means of effecting a partial dissolution.
If corporations never paid dividends, were never acquired for cash, and never otherwise dissolved except through insolvency which returned nothing to shareholders, then your argument with regard to the stock market might hold some weight (there'd still be a potential for a stock market if stock existed, but without an effective claim on assets, its hard to see how it would never suffice for raising capital in the first place.)
But there'd still be investing, even in businesses; it'd just all take the form of bonds.