Think about all the dumb (or at least regrettable) things
that companies have done with the money at their disposal.
For example, here are a few stupid mistakes that many
companies have made:
Bad buybacks . In 2007,
Starbucks (Nasdaq: SBUX) spent close to $1
billion buying back shares of its stock at around $30 per
share, on average. Not too long after, the stock was
trading for about $7 per share -- it has recently recovered
to the low $20s.
General Electric (NYSE: GE) spent almost $8
billion buying back shares in the fourth quarter of 2007 --
when the stock was trading in the $30s. Shares then fell to
below $6 before recovering recently to around $16.
Falling behind. Motorola (NYSE: MOT), a
cell-phone pioneer, has struggled to keep up with
competitors. That has cost the company billions in losses
and forced it to suspend its dividend this year.
Ill-advised acquisitions. Time
Warner (NYSE: TWX) and AOL executives might have
spent their energies more profitably had they not agreed to
merge in 2000. Many sources cite figures that as many as
two thirds of all acquisitions fail to produce the
synergies that the companies involved expect.
Overpaying executives. In 2008,
Abercombie & Fitch 's (NYSE: ANF) stock
plunged 71% while its CEO received $71.8 million in
compensation, according to CNN Money. The same study says
that
International Paper 's CEO took home $38
million in 2008 while the company's stock dropped 63%. And
according to Forbes,
Chesapeake Energy 's (NYSE: CHK) CEO
received compensation topping the $100 million mark in
2008.
It's all head-shaking stuff, isn't it? Here's the main
problem, though: That wasted money didn't belong to those
companies' managements -- it belonged to the shareholders, to
investors like you and me.
A nice tonic
Fortunately, there are ways to combat management
stupidity. One good way is to oust an ineffective leader and
install a more effective one. But this sometimes takes time,
time during which a company loses value (or doesn't grow in
value as much as it otherwise might have). Another way, one
that we rarely think of, is this: Dividends.
That's right. As long as a company pays a generous
dividend, it's obligated to cough up a certain significant
amount regularly, to be paid to its shareholders. Some grouse
that it's an ineffective way to reward shareholders because
the income is taxed twice (taxed initially by the company and
then taxed as income to shareholders). On the other hand,
though, that money does
notget spent on something stupid.
Think of
Coca-Cola (NYSE: KO), with its hefty dividend
yield of 3.2%. The company pays $1.64 per share and has about
2.3 billion shares outstanding. That comes to an annual
payout of $3.8 billion. The company reported about $6.3
billion in net income over the past 12 months, so the
dividend payout is a big chunk of that. Around 60% of the
company's income is simply unavailable for regrettable stock
buybacks, pointless acquisitions, or executive
overcompensation.
Even if a company falters and loses value, until it stops
its dividend, it will still be rewarding you in some way.
Motorola shareholders, for example, collected dividend
payments while their stock swooned.
What to do
When you look at a company and its earnings, remember
that its management has many choices regarding what to do
with that money. It can use it to buy other companies. It can
buy back shares, which can be a
goodthing to do, if the shares are undervalued. It
can pay down debt, which is often smart, especially if it's
being charged steep interest rates. It can stockpile it, as
Apple has recently, with more than $24
billion in cash and short-term investments on its balance
sheet. Or it can pay a dividend.
Dividends are much more powerful than you think.
Dividend-paying companies
tend to outperformnon-payers. Many companies pride
themselves on
raising their dividends regularly. Hang on to solid
dividend payers and you can end up with
an effective yield of 30% or more. Imagine receiving
$3,000 annually from an initial $10,000 investment.
So, if you want some insurance against bad management,
look for dividends. The more money you get, the more control
you have over your company's profits.
Get some pointers to compelling dividend investments by
grabbing a free trialof our
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This article was originally published as
Insurance Against Management Stupidityon
Fool.com
Copyright 2009 The Motley Fool, LLC. All rights
reserved.
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