Dividends Are Forever

CFOs come and go, but cash dividends stay -- and therein lies the problem.

Call it the gift that keeps on giving.

But first, a little background: In December, President Bush let it be known that, as part of his fiscal stimulus package, he intended to remove taxation at the individual level for corporate dividends. A few weeks later, during his State of the Union message, Bush reiterated his call to end the double levy on dividends and thereby “boost investor confidence.”

Despite heavy criticism from Democrats, shareholder rights groups generally greeted the President’s dividend present with huzzahs and handstands. After all, they argued, if stock prices are going to stay flat — or worse — shareholders might at least get some payback from their equity investments.

A fair number of economists (and financial columnists) also heaped praise on the plan, insisting that elimination of the dividend tax would stimulate the moribund stock market. What’s more, they argued the proposal would put more money into the pockets of investors — hence, priming the economic pump.

All of which has triggered a bit of a dividend stampede in corporate boardrooms. In January, for instance, management at Microsoft Corp. indicated the company might actually put some portion of its $42 billion cash-cache towards an honest-to-goodness dividend.

The Microsoft announcement was a real surprise. For years, the software giant has steadfastly opposed paying a dividend, choosing instead to funnel its capital into acquisitions, buybacks, and new projects.

Microsoft management’s decision to start paying a dividend — which it claims was not spurred by the Administration’s tax plan — no doubt had executives at other company’s considering a similar tack. Certainly, recent press reports indicate that a number of companies are considering adopting a cash dividend payout.

They may want to reconsider their considering. While shareholders tend to love cash dividends, such regular payouts increase a company’s administrative workload and reduce financial flexibility. At the very least, these critics caution, the decision to begin paying out a share of profits on a regular basis — what amounts to a fixed cost — should not be taken lightly.

Ira Zar, CFO of Computer Associates, which put a dividend in place two decades ago, says dividends need to be measured and evaluated against other uses of cash. Companies with underfunded pension plans, for instance, may have little choice but to plump up their retirement plans rather than funnel money back to shareholders.

Academic advisors also warn of conflicting cash interests. Gary Jacobi, adjunct professor of corporate finance at NYU’s School of Continuing and Professional Studies, says dividends can be a double-edged sword for any company that relies on issuing stock options to employees.

Since there’s an increased likelihood that stock options would be exercised because a company starts paying a dividend, Jacobi notes, “you’re more likely to have to come up with cash not only for the dividend [on shares outstanding], but also for any large number of diluted shares that are picked up on option.”


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