Security Analysis (100 Page Summaries) by Preston Pysh & Stig Brodersen

Author:Preston Pysh & Stig Brodersen
Language: eng
Format: mobi, epub
Publisher: 100 Page Summaries
Published: 2014-09-29T18:30:00+00:00

Chapter 29—Summary

The Dividend Factor in Common Stock Analysis

In this chapter, the reader learns some important opinions on the methods for valuing Common Stocks. First, Graham expresses his opinion that common stocks should be valued in a similar manner as bonds. Instead of valuing a coupon, Graham suggests the investor should value the dividend. Graham’s main concern with common stocks is the company’s method for distributing the earnings to the shareholders. Graham is of the strong opinion that a substantial portion of the company’s earnings should be distributed directly as a dividend to the shareholder. For example, if a company has consistent earnings of $7 a share, $5 should be paid to the shareholder as a dividend. Graham thinks the higher dividend payment is more important than a lower and more consistent payment. His main reason for suggesting such a high dividend payment is because he thinks most companies’ managements don’t use the retained earnings to add more value to the shareholders. Instead the money is used as reserves for acquisitions (which proportionally add little value) or excessive salaries. Although Graham feels some companies can add value while retaining large portions of earnings, these businesses or far and few between.

Chapter 29—Outline

In a simple, yet important proclamation, Graham says the quantitative value of a common stock is based on three factors:

1. Dividend rate and record

2. Earning power (From the Income Statement)

3. Asset value (From the Balance Sheet)

Dividend Return as a Factor in Common-stock Investment: Although many modern investors look at common stocks differently than bonds, Graham suggests that the market price of common stocks will perform similarly if management pays a healthy and sustainable dividend. To demonstrate his conclusion, he shows two different companies over a decade’s period that paid a consistent $7 and $6 dividend. During this time, the earnings of the companies fluctuated consistently (anywhere from $19.00 per share to $5 per share). Despite the constant change in earnings, the dividend remained intact, and so did the market price. Graham’s point was confirmed by showing that the market price of the common stock reflected the actions of a bond with a similar coupon yield.

Established Principle of Withholding Dividends: If the management decides to withhold a portion of the earnings (the amount not being paid as a dividend), the theoretical reason is management is using the capital to benefit the shareholder. Graham claims that two companies with the same general business model and the same earnings will trade at different prices if the dividend policy is different. The market will value the company with the higher dividend more favorably.

Policy of withholding dividends questionable: Graham raises a very important question: Should a company pay a lower dividend in order to create stability for the owner with an assured payment, or should they pay a higher dividend and meet its obligation irregularly? For example, if a company’s earnings fluctuate between $5 and $15 dollars a year, the average would be $10. Therefore, the ideal situation would be receiving an $8 dividend, while management retains $2 in surplus.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.