The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [267]
* Ironically, takeovers began drying up shortly after Graham’s last revised edition appeared, and the 1970s and early 1980s marked the absolute low point of modern American industrial efficiency. Cars were “lemons,” televisions and radios were constantly “on the fritz,” and the managers of many publicly-traded companies ignored both the present interests of their outside shareholders and the future prospects of their own businesses. All of this began to change in 1984, when independent oilman T. Boone Pickens launched a hostile takeover bid for Gulf Oil. Soon, fueled by junk-bond financing provided by Drexel Burnham Lambert, “corporate raiders” stalked the landscape of corporate America, scaring long-sclerotic companies into a new regimen of efficiency. While many of the companies involved in buy-outs and takeovers were ravaged, the rest of American business emerged both leaner (which was good) and meaner (which sometimes was not).
* The irony that Graham describes here grew even stronger in the 1990s, when it almost seemed that the stronger the company was, the less likely it was to pay a dividend—or for its shareholders to want one. The “payout ratio” (or the percentage of their net income that companies paid out as dividends) dropped from “60% to 75%” in Graham’s day to 35% to 40% by the end of the 1990s.
* In the late 1990s, technology companies were particularly strong advocates of the view that all of their earnings should be “plowed back into the business,” where they could earn higher returns than any outside shareholder possibly could by reinvesting the same cash if it were paid out to him or her in dividends. Incredibly, investors never questioned the truth of this patronizing Daddy-Knows-Best principle—or even realized that a company’s cash belongs to the shareholders, not its managers. See the commentary on this chapter.
* Superior Oil’s stock price peaked at $2165 per share in 1959, when it paid a $4 dividend. For many years, Superior was the highest-priced stock listed on the New York Stock Exchange. Superior, controlled by the Keck family of Houston, was acquired by Mobil Corp. in 1984.
* Today, virtually all stock splits are carried out by a change in value. In a two-for-one split, one share becomes two, each trading at half the former price of the original single share; in a three-for-one split, one share becomes three, each trading at a third of the former price; and so on. Only in very rare cases is a sum transferred “from earned surplus to capital account,” as in Graham’s day.
† Rule 703 of the New York Stock Exchange governs stock splits and stock dividends. The NYSE now designates stock dividends of greater than 25% and less than 100% as “partial stock splits.” Unlike in Graham’s day, these stock dividends may now trigger the NYSE’s accounting requirement that the amount of the dividend be capitalized from retained earnings.
* This policy, already unusual in Graham’s day, is extremely rare today. In 1936 and again in 1950, roughly half of all stocks on the NYSE paid a so-called special dividend. By 1970, however, that percentage had declined to less than 10% and, by the 1990s, was well under 5%. See Harry DeAngelo, Linda DeAngelo, and Douglas J. Skinner, “Special Dividends and the Evolution of Dividend Signaling,” Journal of Financial Economics, vol. 57, no. 3, September, 2000, pp. 309–354. The most plausible explanation for this decline is that corporate managers became uncomfortable with the idea that shareholders might interpret special dividends as a signal that future profits might be low.
† The academic criticism of dividends was led by Merton Miller and Franco Modigliani, whose influential article “Dividend Policy, Growth, and the Valuation of Shares” (1961) helped win them Nobel Prizes in Economics. Miller and Modigliani argued, in essence, that dividends were irrelevant, since an investor should not care whether his return comes through