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Nordic American Tankers Limited Message Board

  • winomaster winomaster Jul 21, 2010 10:39 PM Flag

    The Irrelevance Of Dividends

    Jim Cramer is a noted tout of this stock, pratically making a religion of dividends. But, I would suggest to you that it is irrelevant whether a shipper pays out high dividends.

    Lets pretend we were able to split NAT right down the middle. NAT #1 pays a dividend. NAT #2 pays no dividend. Now let us suppose that the dividends from NAT #1 are reinvested in the company. Does anyone really think there would be a nickels bit of difference between the accrued values of these two investments? When a company declines to pay a dividend, it is simply doing what you do when you reinvest dividends: it is plowing earnings back into the shipping business.

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    • Dividends are not irrelevent. Having made this statement I would like to clarify why it is relevent.

      An asset is built by a company by borrowing in a financial market for a fairly long period of time at a set financial cost to the company. This remains 'set'.

      Another means to borrow is to issue new shares. This fluctuates and if not handled properly may result in capital loss, which essentially a loss in asset value. Whenever this option is excersized by a company to borrow, company should before borrowing should plan buy back of the shares to keep the share price in check to protect it from losing value. The net result of these share should be equal to or better than the first option. It is the share option that financial institutions exploit against companies that has borrowed from them. The cost of borrowing for a 'set' cost does not remain set any more and becomes more expensive as the share prices goes down.

      Digest this much and I will write more on this topic in my future write ups.

    • Dear Mr. Wino: I respectfully disagree that dividends don't count. As a trader (not an investor) we reap opportunities in a fluctuating market by waiting for solid buy-inn opportunities(as we are currently experiencing) and as expierence dictates we don't often achieve the bottem we were looking for. It is then prudent to follow a strategy of only buying small portions at a time untill we have achived our goal # of shares. At fifty two week lows statictics prove its hard not to make money buying at these levels! Currently I am almost "all inn" with NAT and waiting for the illusive rise of this stock back to its normal trading ranges. That is where the dividend comes in! Good as money in the bank- they pay me to wait for pay day. Does your job sitting in the various alley-ways with your constituants sipping out of bottles concealed with brown paper pay you before your next heist?

      • 1 Reply to tomas98037
      • tomas98037
        I think NAT is going to give you what you seek in a stock investment: a small steady return on your investment. These hign dividend companies have correctly gauged that a certain sector of the investing public craves a steady return. These companies actually pay out more than their profits each year. They often pay out the value of annual depreciation on their fleet. Some would say that depreciation should be reinvested in new ships for the fleet. But companies like NAT are about dividends. At its most extream, some of these companies actually borrow or issue stock to pay their dividend. At this point it all begins to resemble a con game to me.

    • Ok genius, if dividends don't matter, then there's no reason to not pay them, is there?

      Also, your suggestion than an ongoing enterprise can always re-deploy retained capital optimally, is nonsense.

      Companies with strong cash flow have an ethical obligation to reward shareholders with dividends.

      If not, then owning shares has no more value than a ponzi scheme in that value can only be realized when the shares are fobbed off on somebody else.

      The anti-dividend crowd is retarded in its thinking to a large degree.

      Reaping income is THE ONLY valid reason to invest in anything.

      The objective of an individual investor should be to acquire strong, growing sources of income.

      Any other objective is madness.

      Sensible investing is very much like planting fruit trees - it takes time, but the results are real and harvestable.

      • 2 Replies to buundawg
      • As far as 'extra' money goes, a company can reinvest in 'growth, but if there is no demand, then expanding the supply of your product is self defeating, yes? no? More boats in the water means less trips per boat means less income per boat. Or they can invest in more office equipment or an executive hunting lodge. Or they can send a few bucks to those of us who own the company. I like the latter option, especially when demand isn't certain. What's the point of investing in expansion in a time like this? Maybe it's an oversimplification. I did read where the majority of the gains in investments over the last 50(?) years were from dividends and not from 'growth'. Don't remember where. It depends on the industry, too, no? Tankers have a pretty limited outlook for suddenly becoming a trendy commodity and expanding demand. IMHO.

      • If you bought your Nat @ $28. in 2004.Well then you have spent your money ,the $28.,and still have your stock now .

        I don't have to make a killing,just a living.I'm happy.

        Best of luck to all.

    • dividends are relevant to investors. You will find the investors in NAT want a high distribution based on a bullish outlook for Suezmax tanker rates and, indirectly crude oil prices. The beta for NAT is 0.82 which means it is also less risky than the market.

      • 1 Reply to lincolnparker60614
      • Some recent postings:
        “Ok genius, if dividends don't matter, then there's no reason to not pay them, is there?”

        Comment: There is an excellent reason for a company not to pay dividends. Retained earnings are an excellent way for companies to finance expansion. The same companies that pay out dividends often find it necessary to issue new shares to meet their capital needs. The dilution that occurs there is hated by shareholders, especially small ones that don’t fully understand what is going on with that tactic.

        “Companies with strong cash flow have an ethical obligation to reward shareholders with dividends.”
        Comment: The rewards flow to the stockholder regardless, by dividends or by stock price appreciation. Look at the shippers that pay the big dividends. Their stock performance is pathetic. You can’t have your cake and eat it too. Companies that set a high dividend policy are trying to appeal to the unsophisticated, with their irrational desire to get paid two ways.

        “Reaping income is THE ONLY valid reason to invest in anything.”
        Comment: People who insist on dividends…if they were ranchers would not consider raising cattle for beef. They would only have cows so that they could harvest that regular income from the milk. Their time horizons are so short they feel the need to get paid early and often. It’s a sign of an immature mind to have no patience in reaping your rewards.

        “Dividends are relevant to investors. You will find the investors in NAT want a high distribution..”
        Comment: I admit there is a psychological appeal in dividends, but I would imagine that the big fund managers give very little consideration to the matter of dividends. Whether a company pays dividends is largely irrelevant to long term profits. If dividends have any effect on long term profits, it is a negative one in that dividends deprive the company of capital for expansion.

    • Your premis seems to make sense but for the following situations: the company uses retained earnings to provide executives with increased compensation through discounted stock options and higher salaries; the market is down in general and the relationship between book value and market price narrows; the investor uses dividends as a source of income. I love NAT for the dividend and the fact that it is there no matter whether the overall market is up or down. As long as the spot price of oil is high. I even make more money when it is appropriate to sell covered calls because of the low volatility of this sotck.

    • then you would love insurance stock they don't pay anybody but the big shots

    • You couldn't be more wrong. It's hard to cook the books when a company is paying dividends.

    • Let's pretend the pre-crash AIG #1 paid a dividend and AIG #2 paid no dividend. What's the difference? Investors of AIG #1 saw the stock go higher than AIG #2 until it crashed and they lost 95% of their investment. Investors of AIG #2 got some money back.

      Re-investing earnings isn't always the best idea, nor is stock repurchase. Both cases require the market to properly value the company, in order for the shareholders to sell their shares and reap their gains. Distributing dividend is placing cash directly in the shareholders' hands, and despite its tax inefficiency, is the most direct way to return value to shareholders.

    • Your point will only grow stronger when we get the new tax on dividends!

    • What you say is true, however not in all cases. Look at CSCO pays no dividend and the stock never appreciates, the multiple keeps dropping. Many more examples. Many investors like me prefer Dividends. Its confirming that management is willing to share the profits and not horde the cash that belongs to shareholdes.

      • 1 Reply to fountain123_45
      • My point is that you are no better off when the company pays a dividend. Any company that pays a dividend, typically immediatly drops in value by that amount. The market is recognizing that dividends lower the value of a company to a certain extent. Granted, high dividend paying stocks commonly have their their stock prices supported by this. But my point is that in the long run, you will do no better with a dividend paying stock. Another point is that a company that pays out its capital in dividends, may have to pay an even higher price to secure the capital it needs. Nothing lowers the cost of capital like a solid balance sheet.

        Paying dividends serves management and investors to a degree because paying dividends triggers an irrational support amoung investors for the stock price. This is a marginal support, and paying dividends is no way to grow a disperses the one thing management needs to fuel growth: Capital. A shipping company should be structured for growth. High dividends should be reserved for companies in a mature, low growth industry.

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