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Dividends," by Eugene Fama and Kenneth
• 5 genuine buys
on a Street of impostors, 10/24/2002
dividends are no magic bullet, 10/17/2002
• What dividends
say about a stock, 10/10/2002
Nothing pays dividends like a new
Investors would do well to look for cash up front. Few
companies are launching dividends anymore, but those that do often
follow up with market-beating performance.
Niederhoffer and Laurel Kenner
Our articles on dividends have elicited thousands
of responses from investors who see dividends as the best way out of
Wall Street's fog. Inspired, we continued our studies and have come
up with a new idea for dividend aficionados.
We reported Oct. 17
that S&P 500 ($INX)
companies that increased dividends this year outperformed those that
cut or stopped them by about 6 percentage points.
Unfortunately, companies that increase dividends are as rare
as the rhinoceros these days. Only 21% of companies pay dividends at
all, down from 67% in 1978. Given that dividends are double-taxed in
the United States, it's no wonder that this is so.
companies are more likely to stop paying dividends than to initiate
them. Between 1978 and 1999, an average of 5% of dividend payers
stopped the payouts each year, according to Eugene F. Fama and
Kenneth R. French in their paper "Disappearing Dividends." (To read
the article, see the link at left under "Related Sites.")
the other hand, the chances were just 1.8% that a company would
start paying dividends. In 1999, only 0.7% of companies initiated
dividend payouts. (Fama and French used the comprehensive Center for
Securities Prices database, which has since 1973 included all stocks
listed on the NYSE, Amex and Nasdaq.)
Those are the
companies we wanted to investigate. The initiation of a dividend
seems like a quantum type of event. Going from zero-ness to
something is even more important than an increase from one positive
level to another. We reasoned it might lead to superior performance.
Furthermore, a company that initiates a dividend may be signaling
that it intends to increase it in the future, or at least doesn’t
fear that it will lack the profits to maintain it.
just 14 companies in the S&P 500 that have initiated a dividend
since the end of 1998. With the exceptions of
and Qwest Communications (Q,
all the new dividends were declared after spin-offs, mergers and
initial public offerings or by mutual companies that had gone
As the table shows, they did very well as a
don't include reinvested dividends
| New dividends and stock
||% chg 12 mos. later
||Difference vs. S&P 500 12 mos.
|John Hancock Financial Services
|R.J. Reynolds Tobacco Holdings
|United Parcel Service
The dividend initiators
rose 7%, on average, in the 12 months beginning the day after
declaring the dividend. The average performance for the S&P 500
was -9%, so the new-dividend companies had an advantage of some 16
percentage points. (Without Qwest, the outperformance increases to
25 percentage points, but these things are so easy in
Considering the intrinsic variability of stocks,
bearing in mind that this is a sample of generally good corporate
citizens and noting the 40% standard deviation of the differential
performance, the results are on the borderline of statistical
significance -- say a 1-in-10 shot by chance variations alone. But
it’s a good start.
3 to speculate
Just three S&P 500 companies announced initial
dividends in 2002: Principal Financial, the big Iowa insurer;
MeadWestvaco, the paper products company; and FedEx, the delivery
giant. We don’t know enough about them to opine. However, they would
seem to be worth a speculation as part of a basket of the next 15 or
20 companies that initiate dividends.
We’re continuing our
research on fundamental analysis by looking at many combinations of
the indicators we’ve studied separately. We will send readers who
write to us at firstname.lastname@example.org
with comments, compliments or critiques about our column a list of
Dow companies fitted with regressions for their performance over the
past three years versus inventory changes, accounts receivables
changes and book-to-pay ratio (that's the ratio of EBIDTA, or
earnings before interest, taxes, depreciation and amortization, to
cash taxes paid).
Last week, we combined three fundamental indicators
-- a buyback announcement, a big decrease in accounts receivable and
a big decrease in inventory -- to find five companies we think will
collectively beat the market. We’re still waiting for a nice down
day to buy them, but here is their performance from the close on
Oct. 23, our publication date, through the close on Oct. 28:
| 5 real buys|
Readers share impostor tales
collective common sense of people is astonishing.
The response to our column on impostors proved Dave
Barry’s point. We received dozens of tips and erudite essays on how
to spot cheats, phonies, quacks and manipulators. Here are two out
of many dozens.
Kate Donnelly Schneider had two brilliant
additions to the four impostor characteristics that trader David
Rosen wrote about in our column last week: unrelentingly trendy,
always on the make, unwilling to discuss risk and your instant “best
5) A toxic person/con artist/impostor also has a history of
failed relationships, of which he/she is the innocent victim.
Their “friends” are only new acquaintances; the test of time has
stripped their veneer. First wives were “nuts” and turned the
children against them, so there's no contact with them. The family
of origin is dead (probably not true) or did some dastardly deed
to the impostor (usually around money) that led to estrangement.
Prior business associates “screwed “ them, thus no contact with
6) There's another kind of impostor -- the Genetic
Impostor -- a bit harder to discern. He or she is in a bunch of
deals with Daddy. He wants to do business or get close to you --
but only to see what you can do for this two-headed monolith. He's
very interested in your success, and interested in you being
impressed by him -- but his “story” doesn't quite add up. He has
no real success of his own, only what has been fed to him by
Daddy, and Daddy has sent him out in search of fresh blood. He
seems to have sprung directly from the loins of Daddy/Predator #1.
You possess the life force on which they exist, so his purpose is
to take all you have to benefit their common good. You are a means
of survival for them.
We haven’t tested the following hypothesis from
Jack Tierney, a Tennessee philosopher who spent many years in
newspapers, but it sure rings true.
A good number of years ago the gentleman who first hired me
was suddenly replaced by a” young Turk" who was obviously on a
career path to the top. The newcomer's knowledge and interest in
our functions was superficial at best; my former boss's life had
been spent in the creative end of advertising so, following
generally accepted business practices, he was made Assistant
Purchasing Manager. In his farewell address to us he stated that
he was “excited about his new position.” The word “excited” struck
me as so inappropriate and inaccurate, and its dissonance has
never left me.Tierney sent several examples of “excited”
companies from among 15,600 he found on Google. Suffice it to say
that all of them drastically underperformed the S&P 500 after
Yet in the years that followed, I've
discovered it has become the accepted way of spinning a disastrous
occurrence. Whenever I hear an executive say that he's excited
about recent negative developments, it's time to walk away from
that stock . . . chances are he is neither excited nor
Who’s the dumb money
James Altucher, a partner in Subway Capital, writes
that market gurus who use sentiment measures as a contrary indicator
belong on our list of imposters.
First, a review of the primary sentiment indicators:
the full compilation of readers’ impostor tales, see http://www.dailyspeculations.com/.
A. The put/call ratio. When this is greater than 1,
supposedly the "dumb money" is bearish.
Intelligence survey of bullish vs. bearish newsletters. When more
newsletters are bullish then it’s bearish and vice versa.
always get bothered by the guys who primarily use sentiment
indicators. It’s as if there is an exclusive club where the secret
handshake is a shared assumption that everyone who is not in the
club is dumb money.
For example, there was a big uptick of
the “the bulls” in the latest Investors Intelligence survey. So a
lot of analysts are saying this is a bear market rally until that
sentiment gets a lot lower, and many of the big financial Web
sites have been recommending shorting into this rally.
think, though, that there is a resource issue. The question is,
who is actually fueling this stage of the “bear market rally”?
A. It’s not the newsletter writers that are surveyed by
(Investors Intelligence). They make a decent living writing
newsletters! Why flush hard-earned money down the toilet?
It’s not the customers of the newsletter writers. Since the
newsletter writers are all “dumb money,” the customers are broke
C. It’s not the mutual funds at this point. Money is
barely trickling in now and mutual funds are standing at 4% cash,
a low for a market bottom. Maybe that's enough to propel the
market on week 1 but probably not week 3.
The bottom line
is, all the “smart money” that’s been going short because of
sentiment indicators is now buying in a huge squeeze.
the time of publication, Victor Niederhoffer and Laurel Kenner owned
or controlled shares in the following securities mentioned in this
article: Dell, Albertson’s, Analog Devices, Paccar and