No. of Recommendations: 45
As you have appointed yourself as the resident expert on the subject of firms introducing dividends, I presume you have read the paper by Sanjay Sharma at MIT? Do Dividend Initiations Signal Firm Prosperity?
The abstract:
In this paper we study the significance of dividend initiations in the context of firm
performance, risk, and shareholder returns. Our evidence contradicts the principal
implication of the signaling hypothesis that increase in dividend rate is positively related
to future firm prosperity. We observe that firms report improving profitability, cash flow
and other performance measures leading up to dividend initiation, but subsequently there
is significant and sustained reversal across all these measures. We also observe that share
prices react positively to dividend initiation announcements, suggesting that they are not
anticipated by investors and are interpreted as positive news. However, over the five-year
period subsequent to dividend initiation stock returns are significantly lower than that of
the market, indicating that investors initially underestimate the deterioration in future
profitability and performance of dividend-initiating firms. An observed decline in firms’
market-to-book ratios over this period suggests that investors eventually lower their
initial expectations of firm growth and prosperity.
Berkshire's business performance will be what it will be, for better or worse, and they will introduce a regular dividend or not. But the empirical/statistical evidence suggests that introducing a regular dividend would be bad for the stock price for a long time. Which makes perfect sense, of course, as the introduction of a regular dividend is a loud declaration that a firm can no longer aspire to be seen as a "growth" firm as it can no longer allocate capital at profitable rates.
As they say, don't let the facts hit you on the way out : )
Jim
