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12/23/2005
Dividend Increases, by Victor Niederhoffer

There are several theories as to why dividend increases are good, and since half of all big companies increase each year it's a good thing to study. One theory is that it signals earnings are going to be good. The second is that it prevents companies from squandering free cash on projects that are beneficial to the employees but not to the shareholders. A third line of research shows that companies rarely rescind dividend increases and a fourth shows that companies initiating dividends are particularly attractive. Dividends have received favorable tax treatment since 2003, certainly among the reasons for the 50% rise in the market since year-end 2002. It's amazing to see, among the many papers on the subject, that same hateful strain that so characterizes all studies of stock market behavior: that reductions in taxes have nothing to do with stock market performance, and investors and companies are completely indifferent to how much they are taxed on the fruits of their labors.

These thoughts were engendered by the 28% increase in PFE's dividend on Dec. 12, followed by the Dec. 16 announcement that their patent on Lipitor had been upheld. How fortuitous. I hypothesize that dividend increases in certain months are particularly salubrious.

Kevin Eilian says:

One of my B School finance profs put it this way: "A company that increases its dividend is like a guy who walks into a bar, sits next to a desirable woman, and shows off by lighting up a smoke using a $50 as cigarette paper."

Prof. Ross Miller offers:

Dividends are a way of transporting money outside the corporate shell. Money within the shell can be forfeited in the event of default, money outside the shell is untouchable except when fraudulently conveyed. Most business school finance professors assume that default does not exist. Paying dividends is like leaving some of your money at home before going on a date. (By the way, the unnamed professor's remark would be considered sexist at most major U.S. universities -- I suspect U. Chicago is an exception -- and could lead to serious administrative action, including dismissal.)

 

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