Determinant 2: The Expected Dividend payout

Determinant 2: The Expected Dividend payout

The amount of dividends you receive at each payout – as contrasted to their growth rate – is readily understandable as being an important factor in determining a stock’s price. The higher the dividend payout, other things being equal, the greater the value of the stock. The catch here is the phrase other things being equal. Stocks that pay out a high percentage of earnings in dividends may be poor investments if their growth prospects are unfavorable. Conversely, many companies in their most dynamic growth phase often pay out little or none of their earnings in dividends. But for two companies whose expected growth rates are the same, you are better off with the one whose dividend payout is higher.

Beware of the stock dividend. This provides no benefits whatever. The practice is employed on the pretext that the firm is preserving cash for expansion while providing dividends in the form of additional shares. Stockholders presumably like to receive new pieces of paper – it gives them a warm feeling that the firm’s managers are interested in their welfare. Some even think that by some alchemy the stock dividend increases the worth of their holdings.

In actuality, only the printer profits from the stock dividend. To distribute a 100 percent stock dividend, a firm must print one additional share for each share outstanding. 

He is happiest, be he king or peasant, who finds peace in his home (Johann Wolfgang von Goethe)

But with twice as many shares outstanding, each share represents only half the interest is the company that it formerly did. Earnings per share and all other relevant per-share statistics about the company are now halved. This unit change is the only result of a stock dividend. When Great Britain replaced one shilling with five new pence, the English, being a sensible people, did not celebrate. Neither should stockholders greet with any joy the declaration of stock splits or dividends – unless these are accompanied by higher cas dividends or news of higher earnings.

The only conceivable advantage of a stock split (or large stock dividend) is that lowering the price level of the shares might induce more public investors to purchase them. People like to buy in 100-share lots, and if a stock’s price is very high many investors will feel excluded. But 2 and 3 percent stock dividends, which are so commonly declared, do no good at all.

The distribution of new certificates for stock dividends brings up the whole concept of actual certificates of ownership. This is an incredibly cumbersome and archaic system and should be eliminated. Records of ownership could easily be kept on the memory disks of large computers. Some bonds are actually recorded that way now. If stockholders could rid themselves of their atavistic longing for pretty embossed certificates. Wall Street could reduce its paperwork burden, commission rates might be reduced, and environmentalists could congratulate themselves on another victory.

Now let’s sum up by printing the second rule:

Rule 2: A rational investor should be willing to pay a higher price for a share, other things being equal, the larger the proportion of a company’s earnings that is paid out in ash dividends.

Determinant 4 : The level of market interest rates

Determinant 4 : The level of market interest rates

The stock market, no matter how much it may think so,does not exist as a world unto itself. Investors should consider how much profit they can obtain elsewhere. Interest rates, if they are high enough, can offer a stable profitable alternative to the stock market. Consider periods such as the early 1980s when yields on prime quality corporate bonds soared to over 15 percent. Long-term bonds of somewhat lower quality were being offered at even higher interest rates.

The expected returns form stock prices had trouble matching these bond rates; money flowed into bonds while stock prices fell sharply. Finally, stock prices reached such a low level that a sufficient number of investors were attracted to stem the decline. Again in 1987, interest rates rose substantially, preceding the great stock market crash of October 19. To put it another way, in order to attract investors from high-yielding bonds, stock must offer bargain-basement prices. The point can be made another way by noting that since higher interest rates enable us to earn more now, any deferred income should be “discounted” more heavily. 

Thus the present value of any flow of future dividend returns will be lower when current interest rates are relatively high. The relationship between interest rates and stock prices is somewhat more complicated, however, than this discussion may suggest. Suppose investors expect that the rate of inflation will increase from 5 to 10 percent. Such an expectation is likely to drive interest rates up by about 5 percentage points to compensate investors for holding fixed-dollar-obligation bonds whose purchasing power will be adversely affected by greater inflation. Other things being the same, this should make stock prices fall. But with higher expected inflation, investors may reasonably project that corporate earnings and dividends will also increase at a faster rate, causing stock prices to rise. Usually, corporate earnings and dividends do tend to grow with inflation.

Thus, the last rule for the firm-foundation theory is:

Rule 4: A rational investor should be willing to pay a higher price for a share, other things being equal, the lower are interest rates.

The Level of Market Interest Rates. Photo by ElenaB.

The Hunter

The Hunter

By Blanche Boshinski (excerpt)

“Look at the long-range implications,” the hunter said over and over again as the men argued.

Doug yelled at Cutter. “Driving drunk isn’t like cheating on your income taxes. I always knew you were a foo!” His voice was ugly, just as it was when Hugo had been missing for two days.

.Probably got chewed up by a coyote, he told Dillon. Then added under his breath, “Or accidentally shot.”

The third night without a warm spot at the foot of his bed, Dillon went outside way after midnight. Maybe Hugo was hurt or hiding out by the corrals.

Finally, after searching and calling way beyond the ranch buildings, Dillon sat and leaned against the tool shed. With his arms across bent knees, he put his head down and cried.

When ths sobs quit, he shivered with cold and looked up. In the glow of the nearly full moon, he saw a figure limp accross the rise to the south, stumble through the yard, and slip into the house by way of the back door. Ni light came on. Dillon scrambled to his feet and raced to the silent, dark house.

It wasn’t until the next day that Dillon knew he had an awful secret.

“If I wrote the confessions, this would be a lot more fun,” Cutter said as he poked another log into the stove and the smoke rolled out into Dillon’s face.

“Then write one,” the hunter ordered, as he tossed blank cars out onto the table. “Everyone contribute an evil deed.” Then he added, “But no sex and no religion.”

The Hunter. Image by Elena.

The old man suddenly leaped from his chair as he pointed to the window.

“An elk rack!” he yelled. “He just passed the window!”

Snow tumbled into the cabin as Doug yanked open the door. The wind doused all warmth as the men, including the hunter, grabbed their rifles from beside their chairs or along the wall and dived into the blizzard.

Dillon unwound himself and slid from the sofa. He set his coffee cup on the table and quickly printed on a blank card: “I know who was with Julia, but I haven’t told.”

He slipped the card into the deck and jumped back onto the sofa.

At the ranch a phone call came the morning after Dillon’s hunt for Hugo. Cutter’s girl had been killed in a car accident on the range road by the Old Mine Bridge. The driver had run off. No one knew who had been driving Julia’s car.

Anger dwarfed any griev Cutter felt.

“If I ever find out who was with her, I’ll kill him.”

Cutter slammed the kitcjen door as he stormed out. In a few minutes he was spurring Diablo at a run along the road leading to the high pasture where the three men raced their horses.

“Cutter won’t ever get another girl as pretty as Julia,” Doug said.

The old man came back into the cabin first.

“I was danged sur I saw something,” he said to the others, who followed him in, stamping their feet and brushing snow from their clothes.

Reading the Fine Print on a Lease

Reading the Fine Print on a Lease

Monthly payments are just the beginning

Randall McCathren, executive vice president of Bank Lease Consultants, Inc., a consulting firm that tracks trends in auto lease financing, advises that, in addition to monthly payment, which is the main shopping comparison consumers use, potential lessees should consider these variables:

Capitalized costs: Don’t lease the car without getting it in writing. Leasing has hundreds of dollars of costs not found in loans (such as contingent liability insurance and credit insurance) so expect to pay at least that much more than for a purchase. The other benefits or leasing may also be worth a higher purchase price, particularly a highly subsidized rate, but remember that capitalized cost can be negotiated just like the selling price of the vehicle.

Residual Value: This is the predicted value of the car at the end of the lease term, and it’s guaranteed. Recognize that the higher it is, the more likely it is that the lessor will lose money at the end. If you don’t know if the lessor is in the business long-term or is ethical, beware of high residual values.

Permitted mileage: The standard is 15,000 miles per year. If you expect to drive less, you should be able to negotiate a lower monthly lease payment.

Early termination right and charge: Look for a lease that permits early termination and has a constant yield (where interest is earned at the same rate every month and is pre-calculated), at least after the first 12 months.

Residential buildings, Manhattan. Photo by Elena.

Purchase option: Look for a residual value fixed-price purchase option or, if you can find it, the lesser of the wholesale value and the residual value.

Excess mileage charge: Make sure it is reasonable if you drive extra miles. For a car worth up $20,000, you shouldn’t pay more than a minimum per extra mile. For a car worth $20,000 to $40,000, excess mileage should cost a little more, and for cars above $40,00, the prices are higher.

Term: Don’t sign a lease for longer than you plan to drive the car. The guaranteed value only benefits you at the end of the term. Never plan to terminate early. If you can’t afford payments on the shorter term, choose a less expensive car.

Liability after casualty loss: Ask if the lease includes “gap insurance”. If not, don’t pay more than a few hundred dollars for coverage and consider self-insuring the risk.

Choosing an Insurer

Compare rates from the biggest

If you live in a non-competitive insurance state, rates are controlled by an insurance commission or rating bureau, and all insurers are required to charge the same premium. However, all rates are competitive and can vary dramatically.

One thing you should factor into your evaluation of a perspective insurer is its reputation when it comes to the speedy processing of claims. To do so, check with the Better Business Bureau or local repair or body shops to find out which insurers have the best and worst reputation.

The largest auto offer different rates and to make sure you are getting the most competitive rates, call a few of them for quotes and compare them with the offerings of smaller companies and independent agents.

The Other Car Payment Not to Forget

Some are far better than others when it comes to savings

Generally, the more expensive a car is, the more it costs to insure. That’s because higher-priced cars cost more to repair and are more likely to be targeted by thieves. Thus a car rated average will cost more to insure than a car also rated average but less high-priced. But there are exceptions.

How to Buy a Wine

Drink No Wine before Its Time

Budding oenophiles can start a modest cellar for $1,500. Here's how

Wine collecting is not an inexpensive hobby, but it doesn't require a huge upfront investment either. A beginner can start a wine collection simply by placing a case of wine on its side in a cool place. As yours tastes become more refined, you can build a wine cellar and stock it with a wider selection.

Temperature is perhaps the most important element in maintaining wine at home. Experts advise keeping the wine in the coolest, driest part of your house. If that happens to be in your basement, stay clear of furnaces and damp areas along outer walls. High humidity will cause corks to mold and damage the wine. If a basement is not an option, try a cool closet or a dry corner of the garage. The ideal temperature range is between 50 and 60 degrees Fahrenheit. Every effort should be made to keep the temperature constant, although storing wine at 70 degrees or so for not more than a few weeks shouldn't harm it. The wine will simply mature faster.

To store your wine collection, place wine bottles on their sides in racks or bins. Simple metal or wood wine racks can be found for less than $70 in the International Wine Accessories or the Wine Enthusiast Catalogs. Most wines, even the very best, reach their peak within 15 years.

When it comes to stocking your wine cellar, start with one bottle each of a variety of brands to find your favorites. A good red wine will have a balance of fruit, alcohol, acid, and tannin, which is produced by grape skins during fermentation. Some white wines have a crisp flavor with a touch of acidity. Others are highly aromatic. For descriptions of individual wines, try the Ultimate Guides to Buying Wine, a monthly or bimonthly newsletters, the Wine Advocate's Vintage guides, wine and vintage charts, which should be regarded as a very general, over-all ratings of a particular viticultural region. Such charts and other sources are filled with exceptions to the rule – astonishingly good wines from skillful or lucky vintners in years rated mediocre, and thin, diluted, characterless wines from incompetent or greedy producers in great years.

Experts advise buying three bottles of each and drinking the whites and the first group of reds within a year or two. Photo by Elena.