Dividends? Or Ponzi Schemes?
Picture me, John Fortune100, the CFO of BigCo. Its that time of the year - when Dividends get paid, and I'm faced with a (somewhat) minor issue - there just isn' t that much cash sitting around. Now remember, Cash Is King - supposedly - in the Dividend world. I can play silly buggers with virtually any amount of paper shuffling, but in the end, if I need to pay Dividends, it is Cash Money out the door. And all I have is my standard operating profits sitting around - oh, say, 10 cents.
I could just ship that out to the shareholders. In fact, I used to just ship that out to the shareholders. But this time around, I have an epiphany - nay - a veritable brainstorm of historically epic-ian proportions. Its 2004, and credit is cheap. Heck, Wall Street is practically giving money away, and all I have to do is borrow from my friendly Wall Street Banker, and Boom!, I've got all this money, which, lets see, I can pay out as a Dividend. Cool! And I get a big fat bonus check to boot! W00t! And before you ask, I'll just borrow even more next year, and use that to pay back this years loan, and so on, because hey, my stock price is going up, and that means my company is more valuable, and that means I can get a bigger loan from Wall Street, and I get a bigger bonus, and I get to pay a bigger dividend, which makes my company look even cooler, which makes my stock price go up even more, which makes my company even more valuable, etc., etc. Genius, I tell you, Sheer Genius.
"Huh?" "Whut"? "WHAT?"
Yeah, yeah, it couldn't be *that* simple, could it? Auditors, the public, everyone, couldn't fall for it *that* simply, would they?
As it turns out, it *is* that simple, and yes, they *could* fall for it that easily.
Floyd Norris has a nice writeup in today's NY Times about how Cheap 'n Easy loans financed the monster dividend payouts from 2004 through 2006. Go read it, but if you don't feel like it, it basically boils down to what John Fortune100 just did up above. And the inveitable is happening. Come the turn of the tide, there are going to be a whole passel of un-necessary bankruptcies, as companies are going to be unable to roll-over their debt.
Cheap money my ass....
I could just ship that out to the shareholders. In fact, I used to just ship that out to the shareholders. But this time around, I have an epiphany - nay - a veritable brainstorm of historically epic-ian proportions. Its 2004, and credit is cheap. Heck, Wall Street is practically giving money away, and all I have to do is borrow from my friendly Wall Street Banker, and Boom!, I've got all this money, which, lets see, I can pay out as a Dividend. Cool! And I get a big fat bonus check to boot! W00t! And before you ask, I'll just borrow even more next year, and use that to pay back this years loan, and so on, because hey, my stock price is going up, and that means my company is more valuable, and that means I can get a bigger loan from Wall Street, and I get a bigger bonus, and I get to pay a bigger dividend, which makes my company look even cooler, which makes my stock price go up even more, which makes my company even more valuable, etc., etc. Genius, I tell you, Sheer Genius.
"Huh?" "Whut"?
Yeah, yeah, it couldn't be *that* simple, could it? Auditors, the public, everyone, couldn't fall for it *that* simply, would they?
As it turns out, it *is* that simple, and yes, they *could* fall for it that easily.
Floyd Norris has a nice writeup in today's NY Times about how Cheap 'n Easy loans financed the monster dividend payouts from 2004 through 2006. Go read it, but if you don't feel like it, it basically boils down to what John Fortune100 just did up above. And the inveitable is happening. Come the turn of the tide, there are going to be a whole passel of un-necessary bankruptcies, as companies are going to be unable to roll-over their debt.
Cheap money my ass....
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