Investors beware: Dividend Growth is misleading

Investors beware: Dividend Growth is misleading

by tonytran2015 (Melbourne, Australia).

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(Blog No.82).

#company #bankruptcy, #investment, #dividend growth, #share dilution, #growth, #Net Earning, #return on investment,

Investors beware: Dividend Growth is misleading.

In analyzing return on a share investment, share-holders use the conveniently supplied figure of

Dividend/sharePrice + dividendGrowth

to compare the return with those of government bonds.
However, the figure is of little value as it is easily manipulated. An alternative figure should be used, it is

Dividend/sharePrice – Dilution + (projected Growth in Net Earning).

1. Dividend Growth is misleading.

Indeed, the yearly schedules of payments of dividends are decided by company directors and may bear no relation with the real healthiness of the company.

Directors can even determine a schedule of increasing dividends that inevitably leads to more and more debts and eventually to the bankrupcy of the company (This is similar to the situations of many Pension Funds in USA in 2017 (Can most pension funds last?, [16]).

2. Growth in Net Earning is more revealing.

The alternative figure for calculating the return on investment is

Dividend/sharePrice – Dilution + (projected Growtth in Net Earning) .

The new figure is more revealing as it tells the (accurately known) dilution of shares by the issue of bonus (free or discounted) shares to directors (Bankers-given-outrageous-incomes-by-their-boards , [5]) and it requires the (responsible) projection of the growth of Net Earning after Interests and Taxes !

3. Shareholders to construct own figures.

Company directors would not want share holders to know the blatant rip-offs using bonus shares. Indeed, shares are diluted immediately after any issuance of additional shares.

Directors also don’t want to risk sticking their necks out giving irresponsibly optimistic (often miserably failed) prediction of Growth in Net Earning after Interests and Taxes.

So companies will try to hide those two types of required figures of Dilution and projected Growth in Net Earning. Therefore investment publications would have only the figure of Div/Price plus past-Dividend-GROWTH.

However, past “performance is no guarantee for the future” in the current treacherous time. So shareholders should not expect the figures to be supplied by any company. They have to search for disclosures on bonus shares and details on operation of the company.

Finally, shareholders should be highly alerted to signs of any one of the following list of risks.

4. Sufficient single causes for a company crash.

Company Bankruptcy signs

Figure: List of single sufficient causes for a company crash. Any single cause in this list can cause a company to go bankrupt.

a/- Its banker does not want to be its easy going, friendly banker anymore. (The bank knows more than you do about the imminent cash flow of the company; see also [11]).

b/- Its clients can buy cheaper elsewhere.

c/- Its suppliers have switched to new clients (with no cash flow problem) who pay more promptly after each delivery.

d/- The company has run out of new subscribers for its new share issues (which is a substantial source of income providing for its yearly expenses).

e/- If the company cannot pay its debt installments and expenses on any due date, it is required by laws to be liquidated.

References

[1]. Ex-HBOS banker ‘sold his soul for swag’, bbc new, http://www.bbc.com/news/business-38842723, 2 February 2017.

[2]. Wolf Richter, S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since, Straight Line Logic , https://straightlinelogic.com/2017/02/19/sp-500-earnings-stuck-at-2011-levels-stocks-up-87-since-by-wolf-richter/

[3]. Barry Ritholtz, Excessive CEO Pay for Dumb Luck, bloomberg.com, https://www.bloomberg.com/view/articles/2017-03-06/excessive-ceo-pay-for-dumb-luck, accessed 07 Mar 2017.

[4]. Colin Twiggs, CEO pay is rigged | Barry Ritholz, Gold Stocks & Forex, https://wordpress.com/read/feeds/289142/posts/1366147221, 07 Mar 2017.

[5]. tonytran2015, Bankers-given-outrageous-incomes-by-their-boards , https://survivaltricks.wordpress.com/2016/12/22/bankers-given-outrageous-incomes-by-their-boards/, posted on December 22, 2016.

[6]. Mish Mishtalk, Margin debts hit record high-coinciding with extreme-consumer confidence, mishtalk.com, http://mishtalk.com/2017/03/30/margin-debt-hits-record-high-coinciding-with-extreme-consumer-confidence-analysts-say-dont-worry/, 30 March 2017.

[7]. stock-markets-sit-blithely-on-a-powerful-time-bomb, sentinel blog, http://sentinelblog.com/2017/04/22/stock-markets-sit-blithely-on-a-powerful-time-bomb/, accessed 22 April 2017.

[8]. https://lplresearch.com/2017/04/07/margin-debt-worry-or-overblown-anxiety/

[9]. Yashaswini Swamynathan, Reuters, The S&P 500 is worth $20 trillion for the first time, business insider, http://www.businessinsider.com/sp-500-market-cap-crosses-20-trillion-for-the-first-time-2017-2, Feb 13, 2017.

[10]. The last time this happened the market crashed, sentinelblog.com, https://sentinelblog.com/2017/04/22/the-last-time-this-happened-the-market-crashed/

[11].How Henry Walker Eltin imploded, https://www.crikey.com.au/2005/02/02/how-henry-walker-eltin-imploded/, 02 Feb 2005, accessed 05 May 2017.

[12]. http://wallstreetonparade.com/2016/08/bailed-out-citigroup-is-going-full-throttle-into-derivatives-that-blew-up-aig/

[13]. https://bonnerandpartners.com/u-s-stocks-are-disastrously-overvalued/

[14]. Michael Pento, curve-inversion-and-chaos-to-begin-by-december-2017, Re-Blogged https://us-issues.com/2017/06/10/curve-inversion-and-chaos-to-begin-by-december-2017/
By Michael Pento – Re-Blogged From PentoPort

[15]. Private Equity firms stuck in brick and mortar retailers, wolfstreet.com, http://wolfstreet.com/2016/05/03/fairway-group-bankruptcy-pe-firms-stuck-in-brick-and-mortar-retailers-albertsons-safeway-ipo/

[16]. tonytran2015, Can most pension funds last?, , https://survivaltricks.wordpress.com/2016/12/10/can-most-pension-funds-last/

Added after Sept 10, 2017:

[17]. https://blog.nader.org/2017/09/13/destructive-stock-buybacks-that-you-pay-for/

[18]. http://us-issues.com/2017/11/26/corporate-earnings-fiction/

[19]. https://survivaltricks.wordpress.com/2020/02/14/bullshit-earnings-charlie-munger-slams-companies-who-use-ridiculous-adjusted-ebitda-to-report-earnings/

 

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