Investing
The premise of Modigliani and Miller, that dividend policy is basically irrelevant in that if a firm is growing then an internal dividend is created and the investor may sell shares to capture this dividend, is based on the idea that in today's market fundamentals matter. They do not. Today's market is driven by central bank policy. Quantitative Easing (QE) has so altered the market and eradicated true price discovery that a simple comparison of charts -- one of a global economy that is collapsing and one of a U.S. stock market at all-time highs -- is enough to persuade any rational person that an examination of central bank balance sheets is warranted. Such an examination would uncover trillions in exposure. The Bank of Japan for instance was a top 10 holder of 90% of the Nikkei in April and has only increased its stake since then (Durden). The ECB is following suit: it began buying government bonds, then corporate bonds, and soon it may be buying stocks directly -- the final prop before Ben Bernanke's "helicopter money" is dropped in order to "save" the markets.
Dividend policy is not irrelevant -- but central banks...
Traders no longer look at micro or macro: they simply front-run the Fed. A
speech by Yellen causes market turmoil. If she is perceived to be too hawkish or too dovish, markets react. Discussions of a rate hike of a mere 25 basis points causes yield seekers to tremble. There is no proportionality -- the market is severely dislocated.
Had dividend policy been allowed to serve as the basis for how investors invest, we could be seeing an altogether different story. It would be a story of companies rising and falling -- instead of simply rising -- no matter whether they are showing growth or not. TSLA is burning cash at an obscene rate -- yet it is bought up by the market as though it were a "growth" stock. AMZN loses money on every transaction in its
ecommerce (it makes money in its cloud services -- but this is not its core business) -- yet it has a P/E ration over 100. AAPL borrows money to boost its dividend -- suggesting that even in this dislocated market, dividends matter.
Apple, in other words, prefers to attract the bird-in-the-hand investors who appreciate…
