Replies to post #247449 on Zeev's Turnips Patch-No Politics (ZEEV)

[ardent jd]

Zeev,

I've tried to keep out of this debate, but I just can't take any more. So here are the "correct" answers to some of the issues raised <g>. On the issue of share buybacks vs. dividends, you are correct and Culmus is wrong. Miller and Modigliani showed a long time ago that dividends and buybacks are economically equivalent in the absence of taxes. Culmus makes the point that INTC's share price would be higher by buying stock than by issuing dividends, which is true enough... but only because the number of shares would be decreased. The capitalization would have been the same in either case (fewer shares times higher price), and stockholders would have been no better or worse off.

You think MRK would have been better off buying some smaller companies than paying dividends? Maybe, maybe not. Don't forget, the shareholders that received those dividends could have reinvested them in the same smaller biotech companies...they don't need MRK to do this for them. So it really comes down to whether you think MRK management could and would have made better investment decisions than their shareholders. Frankly, corporate America's record of adding value through acquisitions has been pretty dismal. On the other hand, a company like Berkshire Hathaway has done a good job in this regard. Still, I'd bet against you on this question, just based on the history of corporate acquisitions.

On your emphasis on tangible book value, I'd generally disagree. Depending on the company, BV is somewhere between interesting and totally irrelevant. There is a large discrepancy between BV and market value for companies like DELL and CSCO. The value created is the difference between the market value (not book) and net contributed capital. Somebody who bought DELL at the ipo and sold today has real wealth, not theoretical. The same point applies to your problem with dilution of BV though share buybacks, which does not trouble me at all. BV is an accounting construct. The share price is what it is.

Okay, I'll shut up now.

[Culmus]

You start to confuse me Zeev. First we discussed about the merits of dividends via stock buybacks and now you come up with another point. -g-

The difference in DELL's current tangible book and the original capital raised in the market does not tell us anything about how much wealth the company has created for its shareholders. As jd pointed out, the wealth created to shareholders is the difference between their purchase price at cost and the price now.

The corporate wealth created also is not simply the difference between current net tangibles and capital raised in the market. You forget about the huge sums the company has spent for stock buybacks which in your view were better spent for dividends.

Jd mentions an important point but oversees another one. Miller and Modigliani Jd? In the end you want to tell me that the CAPM is right as well. -g- Technically you may be right that dividends and buybacks are economically equivalent, but I said that stock buybacks are of bigger advantage under one condition. That advantage of stock buybacks is only available to these investors who buy and hold, because the stock buybacks increase their stake in the company without them having to purchase additional shares. That's one of the reasons for Buffett's yields, he does exactly that and encourages 'his' companies to implement buyback programs.

The capitalization would have been the same in either case (fewer shares times higher price), and stockholders would have been no better or worse off. The capitalization would be the same, yes, but with constant buybacks your stake would be higher Jd.