CHAPTER 10
Roles of Cash Dividends in Security Analysis and Portfolio Management*
The Three Conventional Theories
Cash Dividends as a Factor in Market Performance
The Placebo Effect of Cash Dividends
Cash Dividends and Portfolio Management
Cash Dividends and Legal Lists
The Goals of Securities Holders
Cash dividends are money payments to corporate shareholders paid out of a company’s accounting earned surplus, made in proportion to each shareholder’s ownership interest in the class of stock receiving the dividend. Once the dividend is declared, the stockholder has no choice other than to take it. Control of the size and timing of the payout is with the company and not the outside stockholder.
As we pointed out in Chapter 3, it is unrealistic to view finance and investment problems as if there existed monolithic stockholders and monolithic corporations, or as if there were any necessary relationship between the value of a business and the price of its common stock. Yet, insofar as the three most widely accepted theories about the relationship of cash dividends to value and common stock prices are concerned, the underlying assumptions appear to be based on just such misperceptions. The three most widely accepted theories are those propounded by John Burr Williams, Modigliani and Miller, and Graham and Dodd.
It is important for investors relying on a fundamental finance approach to investing to understand the roles cash dividends play in security analysis, portfolio management, and corporate finance. We believe the real roles of cash dividends tend to be different from those postulated in traditional theories. For us, there are six principal roles of cash dividends:
In a rational world, no investment can be attractive unless there are prospects for a bailout. Bailouts can be of two types: in the first, control of a business can be obtained; in the second, there are prospects that the investment will become convertible into cash in whole or in part. Non-control investments can become convertible into cash because:
- The securities are marketable; they can be sold in the open market; in private transactions; pursuant to a cash tender offer; or pursuant to a cash-out merger or certain reverse splits.
- The minority investor can hope to exercise certain rights, such as rights of appraisal under state law; and/or
- The investor can look forward to the receipt of cash dividends.
We think it is important to distinguish between the significance of interest income to typical holders of senior securities and the significance of dividend income to common stockholders. The goals of common stockholders tend to be less well defined than are those of holders of credit instruments.
Two of the three theories—John Burr Williams’s and Graham and Dodd’s—appear to be compatible with our views, provided the underlying assumptions of each theory are modified to fit in with our ideas of economic and financial reality. The Modigliani and Miller theory, on the other hand, may be useful as a theoretical exercise; it does not appear to have any practical application and is indeed, misleading because it ignores completely the important concept of creditworthiness.
THE THREE CONVENTIONAL THEORIES
The first theory, propounded by John Burr Williams in a book entitled The Theory of Investment Value,1 states that a common stock is worth the sum of all the dividends expected to be paid out on it in the future, each discounted to its present worth. The second theory, propounded by Franco Modigliani and Merton H. Miller in 1958,2 in an article entitled “The Cost of Capital, Corporation Finance and the Theory of Investment,” states in effect that as long as management is presumed to be acting in the best interests of the stockholders, retained earnings should be regarded as equivalent to a fully subscribed, preemptive issue of common stock, and therefore that dividend payout is not material in the valuations of a common stock. The third theory is detailed in Chapter 35 of Graham and Dodd’s Security Analysis,3 and states that in the case of the vast majority of companies, higher common stock prices will prevail when earnings are paid out as dividends rather than retained in a business. Graham and Dodd feel that the only exceptions to this rule are cases where a company’s return on investments is unusually large, and where the company’s stocks sell at high multiples of earnings and at huge premiums over book value.
The Williams theory might be of use in an ideal world, but it is of little help in a complex, wealth-creating economy such as ours. The Williams theory, undiluted, would only apply in a tax-free world where the universal raison d’être for owning common stocks was to receive dividends and the raison d’être of all corporate activities was to pay dividends to common stockholders.
The Williams theory, to be realistic, could be restated to posit that a common stock held by noncontrol stockholders is worth the sum of all the net after-tax cash expected to be realizable in the future from ownership of the common stock, with such net cash being realizable either from cash disbursements by the company (whether in the form of dividends or otherwise, such as liquidating in whole or in part), and from sources outside the company (whether they are stock purchasers or lenders willing to treat the common stock as collateral for borrowings by the shareholder). Such cash realizations would be discounted to reflect time factors and the probabilities of realizations as well as tax considerations and trading costs. Purely and simply, such a theory equates with our bailout views of investment value.
If one wanted to make the realistic assumption that the ultimate goal of all non-control investment is cash realization, then the Williams theory as we have modified it would fit in well with our perceptions of the real world. However, even that has to be modified. It would still not apply universally, since the ultimate goal of all investment is not cash realization. For many investors (for example, a corporation that has no intention of ever paying cash to its equity holders), the goal of its investment may not be cash realization, but wealth creation through control over the growth of unrealized investment values. Other investing entities may combine goals of ultimate cash realization and continued reinvestment.
Unlike the Williams approach to evaluating common stock, the Modigliani and Miller assumptions seem utterly unrealistic. There does not appear to be any basis in fact for assuming either that managements act in the best interests of stockholders or that stockholders have an absolute community of interests among themselves. The simple fact is that relationships among managements and stockholders of public companies are always combinations of communities of interest and conflicts of interest.
Managements frequently, even traditionally, pay lip service to the proposition that they work in the best interests of all stockholders, especially outside stockholders. Increased management salaries and perquisites are justified on the basis that stockholders’ best interests are served by using such compensation devices to attract and hold highly motivated personnel.
Companies go private by buying out their stockholders at discounts from realizable values. This activity is justified on the basis that it is in the best interests of the stockholders to force them to take, in cash, a value that represents a premium over the prevailing stock market prices—even though the prices may reflect a thin market in which very few shares could be bought or sold without increasing or depressing stock market prices. This activity may in fact be working in the best interests of many of the outside stockholders, but certainly not all. The Modigliani and Miller view of the fiduciary management selflessly toiling for the ideal stockholder simply does not accurately describe how all managements of public companies think and operate. Nor does it accurately describe the objectives of the many different types of stockholders.
That managements do not tend to work primarily in the best interests of all stockholders has been pointed out by John K. Galbraith in his book The New Industrial State.4 Management itself collectively and individually constitutes a group that always has some conflict of interest with at least some outside stockholders. Other groups of whose interests the management is keenly aware (and whose interests are at least partially adverse to the interests of some of the stockholders) are other securities holders, such as institutional creditors, labor unions, suppliers, customers, and the staff of the company itself.
If there were any generalization to be made, it would be that management, in balancing the interests of the various groups they feel they have to serve, tends to work more in the best interests of those groups that bring the most benefits to the management. Activities in these directions, though, are tempered by the need and sometimes the desire to guard the interests of other groups, especially those whom management has to constantly deal or negotiate with on a one-to-one basis. Conversely, there is a tendency to guard least the interests of those who are truly outsiders and passive, with whom management rarely, if ever, deals personally. The outside groups that managements of publicly owned corporations tend to view impersonally are the outside passive minority investors (OPMIs) and the Internal Revenue Service, among other tax-collection agencies.
Since managements have virtually no community of interests with tax collectors, there is no tendency to guard the interests of this group, except as required by law and in reaction to threats of audit or other investigatory activity. True, over and above the law, outside stockholders tend to receive better treatment than tax collectors, even though they may be more passive. Most managements do not view outside stockholders either as allies or as adversaries. And there are times when managements want what most outside stockholders want—for example, a high price for the company’s common stock. But this convergence of interests may occur less frequently than many people suppose.
Probably the best indications that managements do not, on the most practical level, work in the best interests of stockholders can be found in the need for an elaborate legal structure to protect outside stockholders from predatory practices by insiders. This legal structure is contained mostly within the securities laws as embodied in the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940, all as amended. Enforcement of stockholder rights against insiders is undertaken by the regulatory authorities themselves and through the private bar, which brings representative and derivative class actions on behalf of stockholder groups. Left without these legal constraints, we have little doubt that many managements would be far less cognizant of the stockholder’s best interests than is now the case.5
The third general theory, that of Graham and Dodd, describes stock market behavior. In brief, it notes the tendency for earnings paid out as dividends to have a greater market value than earnings retained. Graham and Dodd note:
For the vast majority of common stocks, the dividend record and prospects have always been the most important factor controlling investment quality and value.
In the majority of cases, the price of the common stock has been influenced more markedly by dividend rate than by the reported earnings:
Because (1) dividends play a dominant role in the market price of a typical common stock and (2) the discounted value of near dividends is higher than the present worth of distant dividends, of two companies with the same earning power and in the same general position in an industry, the one paying the larger dividend will almost always sell at a higher price.6
While these statements are realistic, their thrust seems to us to be misdirected. A more appropriate emphasis would be not on where a stock would sell in the near future because of its dividend, but rather on which stock—the low dividend payer or the high dividend payer—is more attractive to which type of investor.
CASH DIVIDENDS AS A FACTOR IN MARKET PERFORMANCE
If we were to generalize about the subject, we would approach the stock market impact of dividend payments differently from the way Graham and Dodd do. Other things being equal, the common stock whose issuer is a low dividend payer would be the better buy for investors seeking market appreciation, rather than a cash-carry. As Graham and Dodd agree, of two companies with the same earning power and with the same general position in the industry, the lower dividend company should tend to sell at the lower price; this, by itself, should make the lower dividend payer a more attractive buy for many investors. Furthermore, the company whose common stock is available at the lower price will have more room to increase its dividend and eventually command the higher price. It appears likely that market price action may be more affected by the trend in dividend payments than by the amount of the dividends. The company paying the lower dividend will retain more earnings and in the future be in a better position to improve its industry status, its financial position, and therefore its earnings. It is entirely possible that, assuming the companies are in the same position now, had the company paying the lower dividend paid a higher dividend, it could never have achieved the position it now has.
A reasonable countervailing argument can be made that high dividend payers tend to be the better buy because a high payout ratio may indicate a management more attuned to meeting the desires of most outside stockholders. We believe this argument has elements of validity. Its applicability, however, is limited, since dividend policy does not appear to us to be a particularly good measure of either management ability or management interests. Insofar as there is a tendency for there to be a strong relationship between the long-term economic interests of a company and the long-term prices of that company’s common stock, stockholders are eventually benefited by small or no dividends, to the same extent as companies benefited from profitably reinvesting cash that would otherwise have been paid out as dividends.
Graham and Dodd also state:
Long experience has taught investors to be somewhat mistrustful of the benefits claimed to accrue to them from retained and reinvested earnings. In very many cases, a large accumulated surplus failed not only to produce a comparable increase in the earnings and dividends, but even to assure the continuance of the previously established rate of disbursement.7
This statement is, of course, true, but it is equally true that too high dividends can hurt companies and stockholders far more than conservative dividend policies. There are many cases where companies paid high dividends long after it was prudent for them to do so, and as a consequence the stockholders suffered mightily. Examples range from CIT Corporation, General Motors and Chrysler Corporation prior to their 2009 Chapter 11 filing, to Middlesex Water, U.S. Pipe and Foundry, and United Fruit. These companies and their long-term stockholders would have been better off had dividend rates been lower and had the companies retained earnings to both finance necessary expenditures and provide a cushion against business adversities.
The Graham and Dodd approach has validity from a stockholder’s short-run viewpoint, but does not appear to give much weight to the legitimate long-term needs of a corporation. The Graham and Dodd approach does recognize corporate and stockholder long-term needs if it is assumed that high dividends result in high stock prices that an issuer is able to take advantage of by issuing new stocks at prices based on market values. But this assumption is largely unrealistic. Except for public utilities, most corporations, as a practical matter, can issue new common stock only very occasionally, either in sales for cash or in merger and acquisition transactions.
We are in agreement with Graham and Dodd that corporate dividends and corporate dividend policies are likely to have a meaningful impact on common stock prices. As we point out above, though, different assumptions bring different results. For the broad range of companies, we cannot conclude that high dividends are better than low dividends.
If we were to generalize about the subject, we would approach the stock market impact of dividend payments differently from the way Graham and Dodd do. Other things being equal, the common stock whose issuer is a low dividend payer would be the better buy for investors seeking market appreciation, rather than a cash-carry. As Graham and Dodd agree, of two companies with the same earning power and with the same general position in the industry, the lower dividend company should tend to sell at the lower price; this, by itself, should make the lower dividend payer a more attractive buy for many investors.
We are in agreement with Graham and Dodd that corporate dividends and corporate dividend policies are likely to have a meaningful impact on common-stock prices. As we point out above, though, different assumptions bring different results. For the broad range of companies, we cannot conclude that high dividends are better than low dividends.
THE PLACEBO EFFECT OF CASH DIVIDENDS
Cash dividends increase in importance for securities holders insofar as the holder lacks confidence in the outlook or management or in the reliability of the disclosures used by him in his buy, hold, or sell decisions. Put simply, for the uninformed or distrustful stockholder, cash dividends are a hedge against being wrong. Truly a bird in hand (cash return) for them is worth two, three, or four times the bird in the bush (the appreciation potential arising out of a company’s reinvesting retained earnings and its common stock’s being available at a lower price because of the lower dividend).
CASH DIVIDENDS AND PORTFOLIO MANAGEMENT
Dividends increase in importance with the shareholder’s need for immediate cash income from his portfolio. Of course, when the prime lending rate exceeds 7 percent, and good grade common stocks return no more than 6 percent, it may be asked: Should those in need of income invest in common stocks at all? Such a question misses several points. First, many shareholders desiring income are in locked-in positions, unwilling to sell common shares they own because of, say, an ultra-low cost basis for income tax purposes. Second, many investors seek inflation hedges—securities that combine high cash returns with appreciation potential. Third, dividend receipts may be tax advantaged for shareholders subject to U.S. income taxes. Specific common stocks are likely to have substantially more appreciation potential than senior securities (either because their prices are unusually depressed or because equity holders can participate in the long-term growth of a business), whereas the holder of a senior security without equity privileges has a contractually defined limit on potential appreciation. Although it is true that the smaller appreciation potential of senior securities is made up for, at least in part, by the fact that they are easier to finance, this finance factor may be academic for the prudent outside investor who abhors borrowing on margin to invest in the securities of companies about which his knowledge is limited, over which his control is nil, and where his costs of borrowing might exceed his return on his portfolio.
Dividends become a negative factor for shareholders who want tax shelter or who have no need for income and are confident that management will reinvest retained earnings on a highly productive basis. In a sense and except for the fact that it does not provide a cash return, unrealized appreciation is the ultimate in income tax shelter.
Dividend income tends to be unimportant, also, where a company is not essentially a going concern, but rather is in a resource conversion or a workout situation (that is, with prospects of being liquidated, acquired, or reorganized), because of the expectation by shareholders that realization will be obtained on a more advantageous tax basis than if dividends were paid.
An attractive feature of securities with a high cash return is the positive cash-carry. A safe high cash return not only eases any investor’s pain where performance is disappointing, but also makes a transaction eminently more affordable and easier to finance than would otherwise be the case. This is so because of the benefits a cash-carry brings to the financial position of a holder.
EXAMPLE
Back in 1979, Source Capital Preferred sold at 24, and paid a $2.40 dividend; it was a margin-eligible security. Assuming an investor could borrow 50 percent of the cost of 10,000 shares, incurring a 7.5 percent interest cost, his cash-carry would have been as follows:
| 10,000 shares of Source Capital Preferred @ 24 net | $240,000 |
| 50 percent of purchase price borrowed | $120,000 |
| Cash investment required | $120,000 |
| Annual dividend income on 10,000 shares | $24,000 |
| Annual interest cost on borrowings of $120,000 @ 7.5 percent |
$9,000 |
| Cash and carry gain | $15,000 |
| Cash return on investment of $120,000 | 12.50 percent |
We believed that the Source Capital Preferred $2.40 dividend was exceptionally safe and that the security was de facto an AAA issue. It was the senior security of a large, conservatively managed, registered Investment Company, which was forbidden by law to incur any material amount of obligations that would be senior to this preferred stock issue.
Against this background and assuming our analysis is absolutely correct, it may be instructive to review for the reader those factors that a portfolio manager ought to consider before determining that a cash-carry investment in Source Preferred is both attractive and suitable. First, the investor who believes the cost of borrowing will increase may forgo a Source Preferred investment. Since the investor may not be able to control the cost of his borrowing, there could be adverse cash-carry consequences if interest rates on the bank borrowings increase to over 10 percent and the investor is required to retire or pay down his bank loan at a time when he is unable to refinance. Second, there is a risk of depreciation in the market price of Source Capital Preferred stock if long-term interest rates rise markedly or the market becomes irrational. Some indication of the depreciation possibilities inherent in Source Preferred can be gleaned from the price history of the issue: in 1974, Source Capital Preferred was quoted as low as 17
bid. It ought to be noted, too, that Source Capital Preferred was not overly marketable; there were only about 1.6 million shares outstanding, and these were traded in the over-the-counter market in small volume. Any security holder who might have to sell at any particular moment might be able to dispose of his shares only at discount prices.
While the positive 12.5 percent cash-carry return appeared attractive by itself, appreciation opportunities were limited for the issue. Commencing September 30, 1977, the issue became callable at the option of the company at $30 per share, and the call price would decline each year until it reached $27.50 in 1982. The issue would have not, in rational markets, sold at any appreciable premium over its call price.
Alternative opportunities could have been more attractive. We do not know the entire universe of securities, but conceivably there could have been other issues that offered a better combination of cash-carry safety of income and high return.
Unlike most other domestic preferred stocks, Source Capital Preferred had only limited special tax benefits for corporate holders, through the availability of an 85 percent tax exclusion (the tax exclusion is at the time of this writing 70 percent). As an investment company electing to be taxed under Subchapter M of the Internal Revenue Code, Source Capital itself was not a taxable entity, but instead flowed through its income to the shareholders. Unless and until the bulk of Source Capital’s investments are in qualified dividend-paying equities rather than interest-paying debt instruments, only a portion of Source Capital Preferred’s dividend payments to its corporate stockholders would be tax-sheltered. Back in 1979, a corporate holder of Source Preferred was subject to full income taxes on about two thirds of the dividends, and only in connection with about one third could the corporate holder exclude 85 percent of the payments from its taxable income.
Finally, Source Capital Preferred lacked general recognition by others as a high-quality issue. This factor almost automatically excluded the stock from consideration for all sorts of institutional and quasi-institutional portfolios.
One of the pervasive elements of corporate finance is demonstrated by this cash-carry example. How attractive a security or situation is, is in part a function of how financially strong it is. With the prime lending rate of 7 percent, Source Capital Preferred at 24 was in our view a very attractive cash-carry situation for many; were the prime 10½ percent, not only would there be no cash-carry for Source Capital Preferred at 24, but in the absence of the issue’s being called or tendered at a price in excess of 24, the stock would have been unattractive.
CASH DIVIDENDS AND LEGAL LISTS
Cash dividend income is a legal or quasi-legal necessity for many securities holders. Legal lists in many states require fiduciaries’ common stock investments to be restricted to securities that are currently paying dividends and have paid dividends for a number of years in the past. The accounting practices for business entity investors (such as insurance and investment companies) usually permit them to report as income on common stock investments where they hold less than 20 percent of the issue only the dividends received. These stockholders cannot report as net income any equity in the undistributed earnings of companies whose common stocks they hold in their portfolios. The accounting rule governing this is contained in FASB Accounting Standards Codification (ASC) 323, which states that there is a presumption that undistributed equity in profits or losses of companies whose stocks are in the portfolio are to be included in the business entities’ accounts if 20 percent or more of the stock of such a company is owned.
CASH DIVIDENDS AND BAILOUTS
The ability to convert assets to cash tends to be a key consideration for many buyers of securities for control purposes. It always is a key consideration for outside investors.
Companies with pools of unencumbered liquidity tend to be looked upon as attractive acquisitions for control buyers, in part because there is a lack of uncertainty about minimum values to anyone. Furthermore, large pools of cash may frequently be worth substantial stock market paper premiums to acquirers of corporate control when those acquirers pay in paper consisting of warrants, common stocks, preferred stocks, and subordinated debentures, not cash.
EXAMPLE
Schenley Industries’ cash was worth a substantial premium over stated value to Glen Alden in 1968 and again in 1971 when Glen Alden acquired Schenley securities mostly by the issuance of subordinated debentures. Roan Selection Trust’s cash also was worth a premium to Amax in 1970.
Assuming that an investor can have no element of control over the company in whose common stock he has invested, that stockholder will want to have opportunities sooner or later to convert that investment into cash. There are but three ways that such a minority interest can be converted to cash: first, the security can be marketed; second, the issuer can become involved in resource conversion activities, such as mergers and acquisitions, liquidations or going-private transactions; and third, cash dividends can be paid to stockholders. Frequently, the prospect of cash dividends is the only meaningful assurance a minority investor may have that a cash return will be received on an otherwise locked-up investment.
Without being exhaustive, there are a few simple rules about minority interest investments of which an OPMI in public companies ought to be aware. Once a company has become public, it is required to remain a filing company with the Securities and Exchange Commission as long as there are 300 or more stockholders of record of any class of equity securities.a For control stockholders, there usually are important advantages to having 100 percent control of a company, compared with less than 100 percent. Also, there are usually important advantages in being private rather than public. However, regardless of the state of incorporation, majorities having a “business purpose” do have the right to force out the minorities through a vote of the requisite number of shares, or where the majority owns enough shares, through a short-form merger, which does not require a vote. Whether compensation to the minority in the force-out has to be adequate depends in part on state law, including the adequacy of appraisal rights for dissenting stockholders, and on compliance with appropriate disclosure requirements under federal securities laws.
It is our experience that the acquisition of a portfolio of minority interests is attractive because of the likelihood that parents will eventually attempt to acquire, through mop-up mergers, 100 percent interests in subsidiaries at prices reflecting substantial premiums above stock market prices (which are depressed in part because such securities are liable to lack marketability).
In acquiring these types of minority interest securities, however, it frequently is important to the investor that such securities pay dividends, in part because an investor may need income and in part because the receipt of dividends may be far more certain than cash tender offers or mop-up mergers that may never occur. When situations exist where the parent company finds it essential to receive cash from subsidiaries in the form of dividends on outstanding common stock, cash income may be virtually assured for the outside investor. Two such subsidiaries were Reliance Insurance Company, 97 percent owned by the Reliance Group, and Mountain States Telephone and Telegraph, 88 percent owned by American Telephone and Telegraph. Both Reliance Insurance and Mountain States Telephone had relatively liberal dividend policies.
a Section 12(g)(4) of the Securities Exchange Act of 1934 states:
Registration of any class of security pursuant to this subsection shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a certification with the Commission that the number of holders of record of such class of security is reduced to less than three hundred persons. The Commission shall after notice and opportunity for hearing deny termination of registration if it finds that the certification is untrue. Termination of registration shall be deferred pending final determination on the question of denial. Companies filing with the Securities and Exchange Commission comply with either Section 12 or Section 15 of the Securities Exchange Act of 1934. Section 15(d) has language similar to Section 12(g)(4), permitting deregistration when an issuer has fewer than 300 shareholders of record.
THE GOALS OF SECURITIES HOLDERS
It is important within the fundamental finance approach to distinguish between the goals of virtually all holders of senior securities and many holders of equity securities. A problem arises because many commentators impute to equity owners the same ultimate goals that exist for debt owners.
Many owners of senior securities, especially financial institutions, are interested solely in cash return—interest payable in cash, plus a return of principal, also payable in cash. Most senior securities have limited lives, so that if repayment of principal in whole or in part cannot be obtained from sale in the market, in time repayment will be obtained from the issuer.
In contrast, equity holders may sometimes be interested in cash returns in the form of dividends and the ability to sell shares, not to the issuer, but to the market. However, some equity holders are also interested in an earnings return—in having a perpetual participation in an enterprise that through the plowback of earnings increases in value over time. Such investors are under no illusion that increases in value will be, or are necessarily likely to be, reflected in stock market prices at any given moment.
It is probable that most long-term equity investors have a variety of goals, combining the pure cash-return goals characteristic of many senior security holders, and the earnings return goals characteristic of a person for whom dividends have significant tax disadvantages and who is not particularly aware of stock market price fluctuations. We think that many economic, accounting, and stock market theorists fail to recognize the existence of this second type of investor.
SUMMARY
It is important for investors relying on a fundamental finance approach to investing to understand the roles that cash dividends play in security analysis, portfolio management, and corporate finance. For us, cash dividends serve six principal roles: (1) dividend levels or changes in levels seem likely to impact stock market prices; (2) dividends are also important placebos for noncontrol purchasers of common stocks who lack the confidence in the merits of the equity securities they hold; (3) they are important in portfolio management where prudent managers seek a positive cash-carry; (4) the receipt of dividends may be a legal necessity for certain fiduciaries; (5) they are a form of tax-advantaged distribution for U.S. taxpayers; and (6) they are one form of cash bailout from holding common stocks. We also review the role of dividends as postulated in traditional theories.
* This chapter contains original material, and parts of the chapter are based on material contained in Chapter 14 of The Aggressive Conservative Investor by Martin J. Whitman and Martin Shubik (© 2006 by Martin J. Whitman and Martin Shubik). This material is reproduced with permission of John Wiley & Sons, Inc.
1 John Burr Williams, The Theory of Investment Value (Cambridge, MA: Harvard University Press, 1938).
2 Franco Modigliani and Merton H. Miller, “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Review 48, no. 3 (June 1958).
3 Benjamin Graham, David L. Dodd, and Sidney Cottle, Security Analysis: Principles and Technique (New York: McGraw-Hill Book Company, 1962).
4 John Kenneth Galbraith, The New Industrial State (Boston: Houghton Mifflin, 1967).
5 The one group that might be viewed in the broadest perspective as dedicated almost solely to the interests of outside, passive investors is the Securities and Exchange Commission. On a practical level this is not wholly true, but it is our view that the Securities and Exchange Commission has been more dedicated to the interests of OPMIs than any other group in the economy.
6 Graham, Dodd, and Cottle, Security Analysis, pp. 480–481.
7 Ibid., p. 484.