God is a Capitalist

Monday, December 23, 2013

Slate Article Pays No Dividends

Slate magazine's business and economics correspondent, Matthew Yglesias, advertises his ignorance of investing in his latest rant against dividends: Dividends are Evil. Concerning GE and AT&T's increase in their dividends, Yglesias wrote,
The only problem is that dividends are terrible. Bad for the economy, bad for business, and surprisingly unfavorable to investors. A barbarous relic of a less financially sophisticated era, they’re also indelibly coated with misleading rhetoric that perpetuates sloppy thinking about business, profits, and investment.
 Yglesias then tells what companies should do:
 The impatient move that would benefit the economy would be for a cash-rich firm with an already high share price to invest. Hire more people and do more stuff, upgrade the training of your existing workforce, reward your better employees with raises and bonuses so they don’t go elsewhere, cut prices to build customer loyalty. That’s how profits lead to rising incomes, and how rising incomes lead to demand for the stuff businesses sell.  
Of course, the left does not understand what business is for. Businesses don't exist to "benefit the economy." They exist to make profits for their owners, the people who have invested their savings in the company. No one invests one's savings without the expectation of a decent return in the form of profits. Profits are to business owners what interest is to lenders: profits are repayment of the opportunity costs of giving up the use of one's money.

As Yglesias wrote, companies can distribute profits to share holders in several ways. 1) They can repurchase their own shares, leaving fewer shares distributed among the owners, but the currently high PE ratios make that a bad option. 2) They can hang on to the cash and allow share prices to rise so owners can sell their shares and get the cash. The only difference is the tax rates on dividends vs capital gains.

Finally, 3) They can invest in new projects and grow the value of the company. That's what Yglesias prefers because it creates jobs. Of course in this case Yglesias merely provides more evidence that the left has no regard for the profession of management, as I wrote in A Monkey with two bananas - Why the Obamacare web site cratered. Yglesias has never run a business, but he thinks writing a few articles on the subject qualifies him, like spending the night in a Holiday Inn. It explains why so much the left does fails miserably.

Yglesias should wonder why businesses aren't investing in the US, and it's not short term thinking as he assumes. They're not investing because taxes are too high. The US now enjoys the industrial world's highest corporate tax rate. Regulations are strangling businesses. Over 3 million pages of new regulations have been passed since 1970. And government has created a regime of uncertainty with massive new legislation, like Obamacare and the financial re-regulation monstrosities both of which were thousands of pages long, that make planning and investing impossible.
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